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Executive pay: prince and pauper affair?


What is fair and reasonable executive pay? Is the furore over executive pay due to lack of knowledge or sheer jealousy?

Are the headline writers giving executives a raw deal? Do boards of directors help to constrain executive pay?

How does the return on investment from executive pay packages compare to other outlays of corporate resources?

Unfortunately, there are so many questions rather than answers.

Suffice it to say that there exists opaqueness around the subject of executive compensation which only sometimes gets exposed by jilted spouses in the divorce court!

The objective of this article is therefore to share ideas, highlight issues, put forward opinions and stimulate debate into this quintessential corporate governance issue.

In recent weeks, perceived runaway executive pay in local authority entities, particularly the City of Harare, has been the focus of considerable media attention, with top executives reportedly grossing upwards of $15 000 a month in salaries and perks.

This is against the backdrop of mounting rubbish heaps, overstaffing, ghost workers and generally poor service delivery by the city fathers.

However, for the comfort of mayor Muchadeyi Masunda and his lieutenants, the topic of executive remuneration transcends the confines of municipality boardrooms and remains a contentious issue in the corporate world.

Those who advocate for high executive pay argue that in the global war for talent, executive pay is merely a by-product of supply and demand forces. Pay peanuts and you will get monkeys!

Competitive salaries are necessary to attract top-notch managers and to get them to “stick around”.

From an equity perspective, high executive compensation widens the disparity between executive salaries and rank-and-file workers’ pay.

Tom Albanese, CEO of Rio Tinto, takes home a total of $9 million this year in salary and bonuses. Michael Geoghegan, group CEO of HSBC, Europe’s biggest bank, takes home close to £6 million in 2010.

He has offered to donate up to £4 million of his bonus to charities around the world over the next four years up to 2013.

Was this in response to the stinging criticism of the bank’s executive excess or genuine corporate philanthropy? Your guess is as good as mine!

In 2009, South African mining mogul Marius Kloppers, CEO of BHP Billiton, had a total package for the year of about R77 million.

Is this the case of an executive singing for his supper? According to Statistics SA, the average worker in South Africa earned R125 000 in the year ended June 2009, while the average basic salary of a CEO was R2,4 million.

Perhaps George Orwell captures it aptly in his Animal Farm: “All animals are equal, but some animals are more equal than others”!

During his presidential campaign trail in 2008, Senator Barack Obama attacked excessive executive compensation and stated that he “would like to see executives recognise that when they’re getting as much in one day as their average worker is getting in an entire year, that there is a moral element to that”.

There has been public outrage worldwide over the large and gratuitous termination payouts offered to underperforming executives.

Such severance packages are tantamount to bribing a poorly performing executive to step down.

For driving their companies off the cliff into bankruptcy, many CEOs are rewarded with “golden parachutes”.

It appears boards feel compelled to replace executives who perform poorly but would like to do so in a pleasant and less contentious manner. Do any local examples come to mind?

Shareholders’ interests are represented by a board of directors. In their provocative book, Pay Without Performance: The Unfulfilled Promise of Executive Compensation, published by Harvard University Press (2004), Bebchuk and Fried suggest that where the CEO wields enormous influence over the board, executive compensation is usually higher. Boards get “captured” by the CEO and approve packages that are not in the shareholders’ interests.

The Enron board approved lavish compensation for executives with little oversight, for how could board members be unaware that the company had paid out almost $750 million in cash bonuses for a year in which the company’s entire net income was $975 million?

No wonder the company went on to file for bankruptcy in June 2002.

Early this year, it was reported that a local mining concern (share price down 61,8% year-on-year), with only eight directors paid directors’ fees of $196 000! As if not to be outdone, a trendy commercial bank with 12 directors paid out a total of $209 000.

An increasingly controversial area of executive compensation is that of share options.

In theory, share options are meant to align the interests of managers with those of shareholders.

Both parties stand to gain when the share price goes up.

However, share options may cause executives to engage in risk-seeking behaviour by artificially raising the share price to cash in their options at the expense of the company’s long-term health.

A Wall Street Journal analysis for the period 1995-2002 found a striking pattern where most share option grants bore dates just before a rise in share price. Was this happenstance or chicanery?

The journal suggests the odds of this happening by chance are extraordinarily remote – around one in 300 billion.

Executives, is this not the opportune moment to come out of the closet and set the record straight?

Isaac Mazanhi is a member of the Emcoz Labour Committee contact: imazanhi@gmail.com

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