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David Peetz: Why everybody knows CEOs are overpaid, but nothing happens

David Peetz writes in Pearls and Irritations (9.2.17) about the justifiable concern of many that company CEOs in Australia and elsewhere are overpaid. The author argues that firms are unwilling to do anything about it, because to do so would damage internal relations, undermine status and run against the norms of the corporate system.

‘Across Europe, the US and Australia,, four fifths of people believe business leaders in their countries are overpaid and/or that executive salaries should be capped.

‘In Britain, the head of the Institute of Directors said the “current rate of executive pay is unsustainable”. Several global business leaders have criticised “excessive compensation”. Paul Anderson, then retiring chief executive officer (CEO) of BHP Billiton, saw “no way to justify the incredible compensation” of CEOs.

‘An Australian survey showed a majority of directors considered CEOs were overpaid – yet boards of directors set CEO pay. In-depth interviews with non-executive directors brought out comments like “I don’t think any individual is worth that much”. … This disaffection is founded in reality. From the mid 1980s, real executive salaries grew substantially faster than average real wages.

‘Yet that difference in growth rates has not always existed. In America, Britain and Australia, series on executive pay and average earnings tracked each other fairly closely through the 1970s and early 1980s; but from the mid-1980s they diverged. CEO pay helps explain the rise in top income earners’ share of national income, which in turn is only evident since the early 1980s.

‘Yet evidence shows the link between CEO pay and performance is often either negligible or negative – though there is some evidence of a weak, positive link, but this may be only in particular periods, such as boom times.

‘The issue that bothers the public most, though, is not CEOs being out of line with shareholders (interested in performance) but CEOs being out of line with society. Even if a link existed between CEO pay and performance, this should not in itself create the recent pay divergence. There has not been the substantial improvement in economic performance necessary to explain it.’

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