EXECUTIVE pay is a hot topic, but one of ANZ's most senior executives says he is mystified that Australians love hearing about the millions paid to athletes and movie stars, but slam the remuneration of corporate leaders.
''We seem happy and even proud when our sports people make it onto the list of the top 20 paid people, or similarly when our entertainers make it on Hollywood's best-paid list,'' ANZ Australia chief executive Phil Chronican told an American Chamber of Commerce in Australia lunch yesterday.
''Yet for some reason when people are managing large complex businesses it is seen as excessive.''
Mr Chronican said the issue was not whether an executive was paid $1 million, $3 million, $5 million or more, but why.
- Chris Zappone, Sydney Morning Herald, 5th Apr 2012
Phil Chronican's comments open up all sorts of issues. There are in fact so many that even tying them together is a laborious job. I'm going to try to attempt to.
Firstly, he can't understand why the general public seems to think that executive salary is excessive. Of course he can't, why should he? It's not like he actually rubs shoulders with the general public does he? Why would he want to do that?
People generally expect that there is a link between working hard and being paid more and that's perfectly reasonable but the problem is that that expectation is entirely false.
In a market economy, the price of goods and services is not in any way determined by the intrinsic "worth" of something but by the two opposing factors of supply and demand. Generally suppliers are willing to supply more of a good/service as the price goes up; inversely, buyers tend to buy more of a good/service as the price goes down. A pair of curves graphing price and quantity demanded and supplied for any good or service can be drawn thusly:
At the point where the quantity supplied of a good/service at a particular price and the quantity demanded of a good/service happens to meet at that same particular price, the market reaches an economic equilibrium of price and quantity and sales occur. The two forces of supply and demand are usually in constant battle which is why why we see movements in prices quoted on an almost daily basis for all sorts of things like oil, wheat, pork bellies, gold, tin, silver, wool and even the price of money and currencies themselves.
The price of labour is also a service which is bought and sold. Unlike most other goods or services, the price of labour is generally fixed for a given period of time (after wage negotiations have taken place) and instead of movements on a daily basis, the price of labour moves far more slowly.
The thing with senior executives and corporate leaders of very large corporations, is that their salaries and remuneration packages are not necesarily subject to as rigourous a fight between the two forces of supply and demand. The sorts of people who generally get to decide how much a senior executive should get are most likely to be other senior executives. If people wield that sort of power over both the supply and demand of the same service, then it's very much open to grift.
There is rather a distinct difference between the CEO of a bank and a sports person, actor in Hollywood or other entertainer. I could for instance go about my daily life (and usually do) without going to the cinema, or buying tickets to visit sports stadia. Sports People, Actors etc. are usually paid out of a percentage of gate takings/ticket sales or in the case of footballers, paid bonuses as a result of direct performance. A football club still receives it's income on a voluntary basis from paying customers. It would be incredibly difficult though to go about your daily life without a bank though.
My boss who is an accountant asked a rather pointed question: "If someone were to put a bullet between the eyes of Phil Chronican, would the ANZ suffer a direct loss in profits either equal or above his salary?" This question might be living in the land of hyperbole but it does ask the very worthwhile question of utility.
There are some very agreeable and beautiful talents of which the possession commands a certain sort of admiration; but of which the exercise for the sake of gain is considered, whether from reason or prejudice, as a sort of public prostitution. The pecuniary recompense, therefore, of those who exercise them in this manner must be sufficient, not only to pay for the time, labour, and expense of acquiring the talents, but for the discredit which attends the employment of them as the means of subsistence.
The exorbitant rewards of players, opera-singers, opera-dancers, etc., are founded upon those two principles; the rarity and beauty of the talents, and the discredit of employing them in this manner. It seems absurd at first sight that we should despise their persons and yet reward their talents with the most profuse liberality. While we do one, however, we must of necessity do the other. Should the public opinion or prejudice ever alter with regard to such occupations, their pecuniary recompense would quickly diminish. More people would apply to them, and the competition would quickly reduce the price of labour. Such talents, though far from being common, are by no means so rare as is imagined. Many people possess them in great perfection, who disdain to make this use of them; and many more are capable of acquiring them if anything could be made honourably by them.
-Adam Smith, "The Wealth Of Nations", 1776.
How disagreeable is it to be the CEO of a bank? Granted that you probably have to engage in heated negotations but I suspect that being compensated by means of travel, accomodation, meals etc would probably make up for it.
There is also probably a degree of paying a price for the premium demanded as a result of education and acquiring the talent to run a corporation but again my boss' question is quite pertinent. Could someone of lesser talent do the same job on a lower salary? How about if no-one did the job at all? Would the bank still run itself?
Competition for entry into the financial sector is fierce but unlike Adam Smith's suggestion that recompense would quickly diminish it hasn't seemed to at all.
In 1990, the typical CEO of a FTSE 100 company earned 25 times the pay of the average worker; in 2008 it was almost 120 times. Just two years later even after the Global Financial Crisis (which was caused entirely by a distinct lack of skill, talent and an abundance of grift) it rose to 145 times. According to The British High Pay Commission it is expected to rise to 214 times by 2020.
I don't know what the figures are for Australia but at $2.2 million Mr Chronican personally earns a little over 28 times that of someone in his bank; and yet he still wonders why the general public seems to think that executive salary is excessive.
The solution I suppose is to somehow limit executive salaries; this idea is not new. In 1898 John Pierpont Morgan, whose company is now part of JP Morgan Chase & Co., suggested that executives should earn no more than twenty times the pay of the lowest paid company employee and George Orwell wrote in "The Lion and The Unicorn" in 1941 that maybe something in the order of ten times was in order:
It has been shown over and over again that without some kind of money reward there is no incentive to undertake certain jobs. On the other hand the money reward need not be very large. In practice it is impossible that earnings should be limited quite as rigidly as I have suggested. There will always be anomalies and evasions. But there is no reason why ten to one should not be the maximum normal variation. And within those limits some sense of equality is possible. A man with £3 a week and a man with £1,500 a year can feel themselves fellow creatures, which the Duke of Westminster and the sleepers on the Embankment benches cannot.
- George Orwell, "The Lion and The Unicorn", 1941.
JP Morgan and George Orwell's comments don't necessarily deal with either the economic mechanics of price or even the utility of price but the very strange concept of "fairness". Whether or not something is "fair" is a concept completely unknown to an economist. The perception of fairness very much relies on one's position or standpoint. I'm wondering if Mr Chronican's viewed isn't clouded by his position relative to the general public.
"The ANZ has signalled that as many as 10,000 positions could go in the banking sector over the next two years. That frank assessment came as the bank announced today it would be axing 1,000 jobs."
"The jobs will go from middle management, support and back office operations. The bank says senior executive salaries will remain fixed this financial year."
- Lateline, ABC1, 13th Feb 2012
I wonder for instance how someone like Phil Chronican compares against Henry Ford. Henry Ford in 1914 introduced a minimum wage to his factorys of $5 a day compared with the industry average of $2.40 a day. In response to the Wall St Journal who called it the "economic crime of the century" (15th Nov, 1914) he then increased wages towards $10. Ford even continued to pay his workers wages during the height of the depression despite it hurting his company. Do Ford's policies illustrate what he thought of fairness?
I suppose that there is a major difference between Phil Chronican and Henry Ford though. Ford owned his company and built it up from basically nothing, whereas Phil Chronican is essentially little more than a hired hand himself. His owners are his shareholders and for the most part don't care what the company does so long as they make a return on their investment.
There are a lot of issues wrapped up together within Phil Chronican's comments but the common thread which seems to run through all of them seems to be the perpetuation of this myth that the value of work and wages are connected. This seems to result in a disdain of management by common folk and a form of antipathy of those same ordinary people by people on very large salaries. One thing we an definitely say about the comments is that Mr Chronican doesn't understand the general public's opinion and has refused to do so.