The often-used analogy to sports champions and screen stars is false, writes Adam Schwab.
There is a common refrain from company directors and remuneration consultants when asked about runaway executive pay. When defending a chief executive's $10 million pay cheque or $3 million ''termination payment'', it is that executives are not really that well paid - especially when compared to sports stars or actors.
But like most things to do with executive remuneration, the truth is a far cry from the spin. The top earning Australian executive, Rupert Murdoch, was paid $24.5 million in 2009 (and $29 million in 2008). Westfield's Frank Lowy collected $16.2 million to go with $15.9 million the previous year. The likes of Wal King (Leighton), Geoff Dixon (Qantas) and Rod Pearse (Boral) earned upwards of $9 million, despite the companies they managed providing poor shareholder returns in recent years.
However, this year's executive pay pales in comparison to what investment bankers received in 2007. In that year Macquarie's then boss, Allan Moss, collected more than $33 million (shortly before its share price fell 80 per cent) while its current chief executive, Nick Moore, collected $30 million. The executive team at Babcock & Brown were not far behind, collecting almost $300 million in the four years before the bank's collapse.
Of the top 50 sports stars, most are based overseas and cannot easily be compared to local chief executives. Even so, the highest earning Australian sports person is Greg Norman on $15 million. However, the bulk of his income did not come from playing golf, but rather from his endorsements, golf-course design and clothing range. In second spot was the NBA basketballer Andrew Bogut, who earned $14 million courtesy of a $US60 million ($70 million) five-year deal signed in 2008. Bogut's earnings would have placed him eighth on the CEO rich list in 2008 and third in 2009.
The highest paid sportsman based in Australia is the cricket captain Ricky Ponting. In 2009 BRW claimed Ponting earned $4.26 million. Payments from his employer, Cricket Australia, were less than $2 million. The rest came from endorsements.
The top-earning entertainers were AC/DC with income of more than $100 million. But AC/DC have been based overseas and the earnings would be split among five band members (and possibly former band members, as a proportion of their income was derived from royalties). The second spot went to the Wiggles (whose earnings were largely due to their entrepreneurial zeal and shrewd merchandising). Despite that, the Wiggles earned $45 million, or just over $10 million each, placing them barely in the top 10 earning executives.
Not only are executives paid well compared to sports stars and entertainers, but the comparison itself is not especially fair.
That is because the pay of sports stars and entertainers is derived from their own human capital. Their earnings are based on taking genuine risk. Roger Federer's income depends on his ability to win tennis matches. The remuneration of actors or sportspeople is directly dependent on performance. By contrast, executives use shareholders' capital and pre-existing business structures. A chief executive will arrive at a business which may have billions of dollars of assets (and capital) already in operation. Therefore, an executive's performance is not so much dependent on their own skill or risk-taking, but how they allocate someone else's capital.
If a sports star or actor is not able to perform at the highest level their career will come to a sudden end. But executives receive guaranteed base income as well as bonuses which are largely at the discretion of company boards (and therefore often substantial). And if executives fail to perform (do not allocate shareholders' capital in the most effective manner), almost all receive substantial termination payments. Some receive termination payments even if they choose to retire.
Not only do executives receive what have become obligatory golden handshakes, but unlike retired sportspeople or entertainers they are often able to find willing homes at other companies (which allows them to continue the largesse with another generation of executives).
While good executives who deliver returns from shareholders deserve to be fairly remunerated, those who fail or add minimal value should be paid accordingly. To compare executives who allocate other people's capital to sportspeople or entertainers who are, in effect, sole traders profiting from their own goodwill and risk-taking, is a disservice to shareholders.
Adam Schwab is a former corporate lawyer and author of Pigs at the Trough: Lessons from Australia's Decade of Corporate Greed, published by John Wylie and Sons, to released next month.
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