May 23rd 2015

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Articles from this issue:

COVER STORY No deal in federal budget for single-income families

CANBERRA OBSERVED Mixed budget: 'Battlers' put on the backburner

SOCIETY Marriage myths do not stand up to close scrutiny

INTERNATIONAL AFFAIRS Supreme Court argument goes to heart of marriage

POLITICS Understanding Orwell: the dangers of ideology

EDITORIAL Executive salaries: Telstra CEO bells the cat

ECONOMICS Productivity: do we understand it at all?

INTERNATIONAL AFFAIRS UK election: implications of Conservative victory

NATIONAL AFFAIRS Floating reasons to build our submarines here

CINEMA Best-laid plans oft end in corruption

INTERNATIONAL AFFAIRS New fronts in the fight against human trafficking

EDUCATION Non-government school tuition trumps SES status

CLIMATE CHANGE Bjorn again sceptics show face of intolerance

DRUGS Ice: an epidemic rages under our very noses

BOOK REVIEW The man who would not be prime minister

BOOK REVIEW The father of the green revolution

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Executive salaries: Telstra CEO bells the cat

by Peter Westmore

News Weekly, May 23, 2015

The retiring chief executive of Telstra, David Thodey, raised a very important issue on his last day with the corporation when he told the Financial Review: “I can’t sit here and defend my salary against all the guys who are out there working every day and I wouldn’t try to.

David Thodey

“I think there’s a real issue with income disparity between what an average person gets and some of the really big salaries.”

Mr Thodey earned an average of $9 million a year over his last three years with Telstra. Interestingly, Telstra’s board immediately dissociated itself from Mr Thodey’s comments, pointing out that under his leadership, Telstra’s profitability and share price had increased significantly.

Exorbitant executive salaries have been a major issue over many years, but particularly since the global
financial crisis highlighted the fact that executives of many companies who had been paid millions of dollars in salaries and bonuses were responsible for their bankruptcy.

The traditional argument in favour of very large salaries for CEOs was put cogently by Mr Thodey himself. He told the Financial Review that cutting top wages wasn’t the answer because corporations like Telstra were competing for talent against rivals around the world and had to offer similarly high wages.

Governments in different countries have tried to limit executive salaries, but have had only limited success.

In Australia, the law now provides that executive salaries must be put to a vote at company annual meetings, and if 25 per cent of shareholders have voted against executive salaries for two years in a row, there will be a spill of board positions.

One consequence of this is that now more attention is paid by both the public and shareholders to the level of executive salaries.

Last month, executives of leading oil and gas producer Santos narrowly avoided a first strike by investors protesting against their salaries as its shares and the oil price fell.

A vote on the company’s remuneration report at its annual meeting resulted in 23.5 per cent of shareholders rejecting it. The company has announced a freeze on executive salaries, as well as other measures to reduce the impact of falling oil and gas prices.

More recently, there was a big shareholder vote against remunerations of Westfield Holdings’ Scentre Group, after Westfield’s CEO was reported to have been paid $10 million.

The shareholder revolt is also happening overseas. London’s Financial Times reported on May 10 that there had been a major revolt against excessive executive salaries in some of France’s largest companies.

It said: “Last month, 47 per cent of shareholders in Danone voted against the pay package of Franck Riboud, the food group’s chairman, while 42 per cent voted against the package of Renault chief executive Carlos Ghosn.

“More than a third of voters at Vinci, Veolia, and Schneider Electric have now voted against resolutions on management remuneration – and these are all companies where management pay packages had won more than 90 per cent support last year.”

The claim that high executive salaries are necessary for corporate success has recently been challenged. Two French academics, Xavier Gabaix and Augustin Landier, have shown that high executive salaries are linked to the size of companies, rather than to their success.

Their research also showed that if a company with the 250th most-talented CEO suddenly managed to hire the most talented CEO, its value would increase by just 0.016 per cent (New Yorker, 20 April 2015).

This is arguably the case at Telstra, where former CEO Sol Trujillo, a high-flyer from the United States, was paid a base salary of $3 million but received bonuses which more than doubled his salary.

Mr Trujillo was reportedly paid $13 million in 2008, and a further $10 million, including termination payments, in his final year, 2009. During his time at the helm, Telstra’s share price fell dramatically.

While giving shareholders a vote on executive salaries is important, there are wider public-interest issues related to executive salaries.

There is no evidence to show that government intervention to set CEO salaries would work. But the Australian Shareholders Association (ASA), which frequently has highlighted excessive executive salary deals, argues that there is a need to change the mix in CEO salaries so as to make executive salaries more transparent and more defensible.

It argues that CEOs should have the largest component of at-risk pay among the key management personnel, in the form of performance bonuses. However, it argues that these bonuses should not be short-term incentives, which would encourage short-term decision-making, but rather long-term incentives based on the performance of the company over a period of years.

On his retirement from Telstra, David Thodey raised a further important issue: executive salaries should be linked to the base salaries of ordinary employees working in an organisation. This proposal should certainly be considered.

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