The tone-deaf boards awarding executives massive pay rises

The corporate largesse for executives is even more offensive when businesses have been fighting calls to pay their workers more to match inflation. Wage and salary earners are being told to toe the line and take the pain to avoid a wages spiral that would fuel and entrench inflation.

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That’s a legitimate request, but whatever happened to leading by example?

The Governance Institute study demonstrates that senior executives, already sufficiently well remunerated to be immune from the cost of living pressures felt by many wage earners, are being over-compensated for inflation.

And the base pay increases these executives have been given over the past year is only a small part of their remuneration story. Their average base pay comes in at around $1.5 million annually.

For them, the real money is made in bonus payments – which can be a multiple of their fixed salary.

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The report found that 52 per cent of listed company managing directors were eligible for a performance bonus, with the average maximum bonus being 89 per cent of their base pay. About 51 per cent of listed chief executives were also eligible for performance bonuses, with the maximum bonus averaging 72 per cent.

There are many elements that determine the level of bonus payments, but most are tied in some way to profit performance. And in the most recent six-month reporting period to December 2022, companies recorded relatively strong profits, despite inflation.

Critics have argued that price gouging has been a contributing factor in this, though how widespread this practice has been is questionable. That said, the opportunity to raise prices further will be constrained going forward, as each additional interest rate rise further hits household balance sheets.

More generally, larger listed companies have long argued that executive salaries are being bid up because talent is difficult to find and shareholders’ benefits from getting skilled leaders outweighs the cost of recruiting them. In other words, you get what you pay for.

It will be up to shareholders to decide during the annual general meeting season later in the year whether they’re okay with that. Traditionally, they have been prepared to wear higher executive remuneration, if it is commensurate with stronger profits – and higher dividend payouts.

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