Tapu Misa: We tolerate top pay overkill at our peril

I don't blame Paul Reynolds for giving me another reason not to go back to Telecom. It takes a special kind of person to take home that amount of money without feeling embarrassed. I just wish his board wouldn't go on about what a bargain he is at $5 million ($7 million if you count all his shares).

When Telecom's chairman talks about how Reynolds and his million-dollar Telecom executives get a fair reward for the outstanding job they do, I can't help thinking: what did the other 8500 or so Telecom employees do while Reynolds and his executives saved the company, all by themselves?

Apparently it's petty to note that the product of all this outstanding effort was a 44 per cent drop in profit. Or that this happens at the same time that up to 1000 line engineers are being forced to become independent contractors - no doubt as a cost-cutting efficiency measure.

Already I hear the accusatory cries from those who feel that merely questioning such excessive packages amounts to the politics of envy. We are supposed to swallow the disproportionately large salaries paid to a supposedly deserving and special elite as necessary and just.

Maybe it's too late to turn the clock back to the days when chief executives' salaries were in the same universe as the ordinary worker, but who says we have to meekly accept that ever-widening pay gap? Whatever happened to fairness?

Many of us wouldn't dream of using a company we know to be guilty of exploitative business practices, yet we're happy to give our money to companies which pay lavish salaries to their top executives while keeping a lid on the pay packets of their lowest-paid employees.

It wasn't always that way. In 1980, when the gap in income inequality was just starting to widen, the average United States chief executive earned 42 times as much as the average manual worker. By 2007, the CEOs of 365 of the largest US companies received well over 500 times the pay of their average employee. In many of the top companies, the chief executive is paid more in a day than the average worker is in a year.

In New Zealand, a Reserve Bank study found that whereas a CEO could expect to earn eight times as much as the average worker in 2000, by 2006 the average CEO pay packet was 19 times the average wage.

In another study, New Zealand had the fourth highest ratio between the pay of CEOs and production workers in the manufacturing sector. The US led at 39 to 1, followed by Britain at 31. New Zealand was 24.9 and Australia eleventh at 15.6.

Why so many of us tolerate that is a mystery to me.

As a former chief executive of the New Zealand Institute of Management, David Chapman, told Radio New Zealand's Morning Report last week, some top pay packets are obscene. They are neither justifiable nor sustainable in New Zealand.

A review last year by the International Labour Organisation has found little or no evidence of a relationship between executive pay and company performance and suggested excessive salaries likely reflected the dominant bargaining power of executives.

Unjust Rewards, a book published last year by British writers Polly Toynbee and David Walker, argues that the stratospheric rewards paid to executives are incommensurable: they don't fit on any known scale.

"No calculus exists that justifies [Barclays Bank head Bob Diamond's] £80 million ($189.5 million) as a measure of his performance, let alone relates it to the £18,000 paid to the security guard at Barclays' front door.

"Morality aside, high rewards are not causally linked to corporate effectiveness. Excess pay eventually becomes visible to those lower down and breeds organisational discontent."

John Philpott, the chief economist at the Chartered Institute of Personnel and Development, talks of the need of "a closer association between the way organisations approach executive reward and reward strategy as applied to the rest of the workforce" - in other words, fairness.

Harvard Business School professor Rakesh Khurana has argued that CEOs aren't that special. They "need not meet any rigorous standard of skills or performance but only be the right sort of person from the right sort of company".

If there is a shortage of talent, it's because boards "employ limiting criteria to define the pool of eligible candidates".

Toynbee and Walker say the astronomical salary packages aren't being paid to the Richard Branson type visionaries or rugged risk takers, but to managers who "make deals, cut costs and punt mergers in order to boost short-term share price".

"Boards now pay windfall gains for routine performance linked to general stock-market rises - and when bad decisions are exposed, as in the collective explosion of bad lending by banks, none ever had to repay the money they made for getting it wrong. Others paid for their mistakes."

Why does this matter? It's not just companies that become more divided and unhappy as wage gaps widen. There is mounting evidence that we tolerate inequality at our peril - and that we all pay the price when we become more unequal and unfair as a society.