Mirko Bagaric: Corporate, capitalist model the true villain

Worldwide fury at runaway corporate salaries in a time of mass corporate meltdowns has more to do with unfulfilled shareholder greed than a moral failing on behalf of corporate executives. It's the corporate, capitalist model that is the real villain in this piece.

To understand the reason for this, it is necessary to understand the reason for the hefty pay packets of company heavyweights. Accountability and responsibility is severed when you decouple decisions about payment from ownership.

Individuals generally make prudent, rational decisions about their expenditure because the money is coming from their pockets. That's why people employed by sole traders or partnerships never get paid above the odds.

Okay, law firm partners often get paid over the $1 million mark, but that is only because they personally generate at least twice this amount. When it comes to setting corporate salaries, it's a free for all because the money comes from shareholders who are effectively excluded from the salary determination process. It is a luxurious position for company executives to be in, knowing that nobody who has a direct interest in the money they will be milking sets their pay.

A fundamental constant in life is that all human action is referable to one of six desires: power, fame (ie. status), love (including loyalty), fear, sex and money. Fame, love and sex (Friday drinks aside) are absent in the corporate setting. That leaves open the scope for an unbridled pursuit of money and power.

Thus, given that the owners of the money don't have much direct control in decisions relating to how their money is spent, it is inevitable that corporate executives are going to award themselves large salaries.

But are they above the odds? This requires an assessment of the worth of human labour. From a functionality and utility perspective of human activity, the people that rate the highest are those who provide others with the necessities of life.

In descending order, these are health, food, security, shelter and education. Thus doctors, farmers, police, builders and teachers should be at the top of the pay mountain.

Yet, there are other elements to the pay matrix. One of them is supply and demand economics and the desire by consumers to make their money go as far as possible.

Teachers, builders and even doctors aren't paid over the odds simply because there are lots of them and market forces drive down the amount they can charge for their services.

The reason why there are lots of these types of professionals comes down to one or more of the six motivators for human action. Thus, people often become doctors and teachers because they think it will give them status and it is the way to make money consistent with their interests and skills.

So where does that leave corporate salaries? By any measure they are large. For example, the top 10 CEOs in Australia in 2007 averaged more than $15 million annually.

Those types of figures might be justifiable to people with rare, nearly unique skills and insights whose management profoundly catapults a company. But you see, there are no true geniuses. Even those that at the right end of the bell curve of human capacity normally fail to implement their talents in a manner that is commensurate with their acumen.

In truth there is nothing that a $15 million executive can do that the next bloke or lady couldn't do just as well for $200,000.

Still, in judging the ethics of executive salary, you need to look at the whole matrix and in this context the white elephant is the public company structure. The executives aren't taking from the poor; they are taking from the shareholders. This raises for consideration the degree of concern that shareholders are entitled to.

There is one sole reason that individuals turn into shareholders and buy small parts of big corporations: to make money. Moreover, they don't want to do anything to make their money. It is a purely passive investment. By and large shareholders don't care how the corporation makes money, so long as it is successful in this pursuit.

Shareholders only get angry when corporations start losing money and hence the sudden revolt against executive pay. Shareholders and corporate executives are cut from the same cloth. They share a fundamental desire to make money for the sake of it. They differ not in nature, but simply in the extent to which their activities can enrich them.

Hence the current fury towards executives is hypocrisy at its capitalist finest. Never in the history of the free market have shareholders complained because their shares increased too much.

In the end, the fury about corporate salaries is simply an expression of unfulfilled greed - this time not by directors, but by shareholders.

* Mirko Bagaric is a professor at Deakin University, Victoria, and a lawyer (who is happy to take on more corporate clients!).