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February 27, 2009

Are executive salaries part of our present problem?

We have been constantly reminded that one of the main reasons for high executive remuneration is the need to attract and retain world class leadership in our corporations. Consequently we have seen annual remuneration spiralling above $10m per annum in many of our largest corporations. Such packages not only mark significant reward for expertise, they create significant pressure on executives to produce results commensurate with their remuneration. To demonstrate to shareholders (and possibly to themselves) that they are worth such compensation, there is a subtle pressure to make changes in order to improve profitability, increase growth rates and shareholder returns. And quickly. It is quite feasible to recognise the pressure towards short-term thinking for quick improvement in a corporations reported fortunes. With the average rate of turnover less than five years, what benefit is there in working on developments which will have significant long-term benefits? What incentive is there to adopt short- and medium-term pain in order to set up a business for decades to come? The pressure to justify the remuneration creates an environment where it is beneficial to sacrifice long-term creative thinking for short-term creative restructure, and has perhaps encouraged increased risk-taking. It explains why so few companies are ahead of the curve when it comes to carbon emissions. Why it is easier to close an operation in Australia because costs are cheaper overseas. The bottom line in this year's report is more important than the well-being of the workers or the country in which you sell.
The pressures on business executives are immense and worthy of recognition and reward. But have we created extra (counter-productive) pressure by rewarding at the levels which have been evident in recent years?

Posted by gary at February 27, 2009 10:25 PM

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