CEO compensation in Australia: Is there a relationship between principles, policies and practices?

Abstract

Against a background of much debate and controversy, CEO compensation continues to increase at twice the rate of average weekly income in Australia. This paper first critically analyses the criteria upon which CEO compensation is established, and the policies which have facilitated the increasing divergence between CEO compensation and that of the rest of the workforce. Second the paper investigates the relationship between CEO compensation and organisational performance across a diverse range of listed Australian companies over an II-year period. The results from this study indicate there is a very weak positive relationship between CEO compensation and organisational performance. Third, the paper explores emerging issues and trends in the ongoing refinement of the relationship between CEO compensation and organisational performance.

Executive Compensation: Balancing Competing Priorities

“…It is argued that there is a shortage of suitably qualified applicants. The increasing complexity of organisations and the decisions that need to be made (for example, downsizing and restructuring) require compensation packages that reflect the difficulty of attracting and retaining these decision makers in an ever more dynamic environment characterised by globalisation, competition and complexity (Holland et al 2001;Pratt 1996). The shortage means that organisations are hiring from one another.…”

“…That is, Australia is increasingly influenced by international trends in both the structure and quantum of executive remuneration, notably those of the United States. On the other hand, Holland et al (2001) note that only a few companies recruit globally: in reality most organisations recruit executives from local or culturally similar markets. An alternative view is that there is not really a labour market for senior executives and CEOs.…”

“…These allow executives to gain personal rewards, which can be substantial, based on a future stock price reaching a predefined level. The increasing use made of stock options coincided with a 'bull' share market such that share prices increased even without improvements in the performance of the organisation (Crystal 1998;Holland, Dowling and Innes 2001). This has resulted in discussions about alternative performance measures.…”

“…Two Australian studies (Holland et al 2001;O'Neill and Iob 1999) found that the usual determinant for CEO pay was job complexity . For senior executives, job complexity, age and experience are important.…”

Executive Remuneration: Achieving Accountability through Disclosure

“…Early Australian studies on the relation between pay and performance test a variety of firm performance measures, including share price and accounting indicators, and find no consistent or significant relation between CEO remuneration and firm performance (Coulton & Taylor, 2002;Defina, Harris & Ramsay, 1994;Fleming & Stellios, 2002;Holland, Dowling & Innes, 2001;Izan et al, 1998;Matolcsy 2000;O'Neill & Iob, 1999). These studies rely on Australian reports prepared prior to 1998, which suggests that the limited disclosure of detailed executive remuneration information during the period contributes to the inconsistent nature of the results.…”