Editorial: CEO salaries ought to be reined in

What concerns Mr Powell particularly is whether enough is being paid to staff on the shop floor within his company. Photo / Brett Phibbs

Opinion

Quality leadership should be properly rewarded but perspective used to ensure it is not over the top

Hats off to Mark Powell, the chief executive of the Warehouse Group, who says his $1.7 million salary package is a "ridiculous amount". He has drawn attention to an issue that troubles not only himself but those worried about the economic and social consequences of a widening income gap.

If Mr Powell is not the first business leader to speak out, ongoing examples of jaw-dropping payments add a timeliness and resonance to his comments.

Take, for example, the $4.1 million paid to the ANZ Bank's top boss, David Hisco, and the $3.5 million-plus received by the Fonterra chief executive, Theo Spierings.

What concerns Mr Powell particularly is whether enough is being paid to staff on the shop floor within his company.

His total pay packet is about 50 times that of his average staff and 31 times the average wage. Various remedies have been suggested to close that gap. The Shareholders Association wants to limit the chief executive's pay base to no more than 20 times the average wage of $54,700. That would put them on just over $1 million a year.

Another, somewhat more plausible idea, is to link their pay more closely to what their employees receive. Another, even more desirable, is to tie their salaries to company performance. Someone like Paul Reynolds, who was paid $12 million-plus during his last year at Telecom, can be said to have done a difficult job well, thus justifying, at least in part, that massive salary. People will always be angered by those who perform poorly but still walk away with substantial sums.

The problem with limiting chief executives' pay to a certain sum above the average wage is that it does not heed sufficiently the importance of good leadership. Chief executives who invigorate enterprises, are respected by and motivate staff and provide clear visions can be worth every dollar they are paid.

They not only protect the jobs of their staff but ensure shareholders are well rewarded. It can be extremely difficult to put a figure on the value of this.

Therefore, it should be up to a company's board, its shareholders and the chief executive to arrive at a salary package. A recurring reason for excessive payment is the failure of shareholders to stand their ground. In part, this is a consequence of the involvement of institutions as dominant shareholders.

They are often short-term holders of shares and have little interest in corporate governance. Too often, salary packages recommended by consultants keen not to annoy a company have been accepted without question. Too often, these packages have featured short-term bonuses issued with overly favourable terms and without adequate vesting periods.

It is not difficult to see why many chief executives are keen to earn all they can. Generally, they serve only a relatively short period with a company before they move on or are moved on. Nonetheless, they should, like Mr Powell, be able to see beyond self-interest.

There is no suggestion they should not be well rewarded, only that this should not be wildly out of kilter with what their staff earns. If this becomes more widespread, calls for higher income tax rates for top earners will, inevitably, gather pace.

The better outcome would be sharper shareholder vigilance to ensure strong leadership is acknowledged but not at the cost of an unjust concentration of wealth in chief executives' pockets.