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Wring out the golden handshake

by Dr Simon Longstaff
11 February 2000
The recent decision by AMP to pay its former managing director George Trumbull AU$13.2 million as a 'golden goodbye' has rammed the issue of executive remuneration back into the full light of public consciousness. NSW Premier Bob Carr has labelled such payments “obscene and vulgar”, and even the Australian Chamber of Commerce and Industry's normally conservative and business-friendly Mark Paterson has been reported as agreeing.

The directors of AMP may feel that they had little choice but to settle its dispute with Trumbull by paying him a fistful of dollars. However, we should remember they were the authors of their own discomfort when they employed Trumbull under such extraordinarily generous conditions.

Indeed, that decision (and others like it surrounding AMP's demutualisation) led directly to this latest debacle. Now, some will say that the outrage surrounding this payment is nothing more than a fit of pique from the envious. Others will point to the anger as evidence of small-mindedness, as an aspect of the tall-poppy syndrome, or even as a failure to understand the realities of the global market, in which an ability to attract world's best business talent depends on a capacity to pay millions of dollars in remuneration.
Business is part of the community and needs to take up its fair share of responsibilities - not just by generating material wealth, but also by helping to define the tone of the society in which we live.

I suppose that there may be something to this. However, the deeper truth is that the issue of executive remuneration is emblematic of a far more serious set of issues that go to the heart of questions about how we define and secure our society in a rapidly changing and interdependent world.

So, what are we to make of these multi-million-dollar pay packets?

Typically, the value of these packages is inflated by the granting of options over the company's shares. The idea is that executives will only do their best when their interests are brought into alignment with those of shareholders. The more money the shareholders make, the more the management makes. At least that's the theory. As Trumbull's case makes clear, you can get pretty rich by making the shareholders poor.

However, the ethical issue is not just a matter of consistency. The whole approach of using remuneration to align the interests of managers and shareholders raises more profound questions. For example, are we really to believe that our corporate thoroughbreds will turn into plodding hacks if we remove the golden carrot from under their noses?

Whatever happened to the notion of doing your duty, of aiming for excellence for its own sake? What would the pioneers of Australian industry, people such as Essington Lewis, who built BHP, make of the suggestion that they would have tried harder and done better if only they had been granted options? Do we really want to suggest that this is the only – or even the best – way to motivate people to do their jobs? Do we really want to operate on the assumption that human nature is so innately corrupt and selfish that it has turned dedication into something that can only be bought by the highest bidder?

Then there is the question of the quantum of payment thought necessary to secure talent in corporate Australia. While some are concerned by the absolute amount paid to some of our top executives, many others are bewildered by the relative differences in remuneration made available to people working in the same organisation, and between organisations.

They ask if it is really the case that one person can be a hundred times more valuable than another. While it is true that the responsibilities, stresses and strains placed on senior executives are considerable, many find it hard to believe that the difference could ever be so great as to justify paying millions of dollars to one and tens of thousands to another in the same organisation.

The typical answer to this sort of challenge is for people in business to say that the huge amount paid to some is a product of having to search for top executives in a global market. It is said that if you want the best, then you need to pay for it and that global competition for talented executives is ramping up prices. However, for there to be a market, the willing sellers (of their talent and experience) must be matched with willing buyers.

But why are boards of directors such willing buyers? Do they really think that the most expensive is always the best? Is that what the board of AMP believed? Indeed, do the boards of Australian companies ever concern themselves with the values and principles of those whom they employ – perhaps wondering how the leaders of their organisations can so happily measure their worth as being so much greater than that of their colleagues?

Signs are that shareholders, especially in the US, are starting to ask the same questions. They are not amused, and the bull market in executive salaries may be nearing its end. So, perhaps the market does get it right – in the end.

The traditional Australian aspiration to ensure a fair go for all needs to be made a reality. This is not a task for governments alone. Business is part of the community and needs to take up its fair share of responsibilities – not just by generating material wealth (important as that is) but also by helping to define the tone of the society in which we live.

Companies such as AMP have an important role to play. These days they have a lot of power. It should be exercised in a socially responsible manner – for the good of us all.
Dr Simon Longstaff AO is Executive Director of St James Ethics Centre.