Australian CEOs are still getting their bonuses. Performance doesn’t seem to matter so much

Almost all of Australia’s top chief executives are, according to their boards at least, knocking it out of the park in terms of performance.

That is despite sluggish productivity^[1], persistently high carbon emissions^[2], rising inequality^[3] and Australia’s public spending on research and development being among the lowest^[4] in the OECD.

According to new data^[5] from the Australian Council of Superannuation Investors, 91% of Australia’s top chief executive officers (CEOs) received some form of performance bonus last year. That elevated their pay well above their base salaries (which were already over A$1 million). Only five CEOs out of 142 eligible for a bonus received zero.

The fact nearly all of Australia’s top CEOs are receiving these performance bonuses shows performance pay is more about rewarding conformity and discipline than risk-taking and entrepreneurship.

Do we really believe 91% of our CEOs made big bets that paid off last year? A more plausible explanation is that we simply reward executives for not stuffing up. Their customer base is growing in line with population growth and their prices are rising faster than their cost of production, which means profits rise without too much effort.

Not keeping up with change

Take the electricity industry for example. It’s hard to imagine an industry in which change is more inevitable than the industry responsible for transitioning away from gas and coal-fired power stations to renewable energy.

But according to the Australian Bureau of Statistics, the electricity, gas and water industry spends a mere 0.24% of sales^[6] on research and development each year. That is half the economy-wide average.

Unfortunately, innovation does not appear to be a prerequisite for CEOs being rewarded with large bonuses. According to Energy Australia, its CEO Mark Collette (base salary over $1 million^[7]) recently challenged a room full of other well-paid leaders at Australian Energy Week to continuously ask themselves: “Will this make energy cheaper?^[8]”

However instead of focusing on keeping costs down for consumers, companies have sometimes resorted to misleading statements. Energy Australia recently admitted to misleading customers^[9] by claiming the coal and gas-fired electricity it was selling was “carbon neutral”.

Energy Australia was buying widely used carbon offsets^[11] to make the claim the fossil-fuel fired electricity it was selling was carbon neutral. In its apology Energy Australia conceded “offsets do not prevent^[12] or undo the harms caused by burning fossil fuels for a customer’s energy use”.

While it is clear Energy Australia’s spending on carbon credits did nothing to make the company’s energy cheaper, it is not yet clear if the board will award a “performance bonus”.

Leading the world – in pay packets

Another example of the lack of relationship between CEO pay and organisational performance is Australia’s university sector. The vice chancellors of Australian universities are among the best paid in the world^[13], with over a dozen Australian earning more than the head of Cambridge University.

But there is no correlation between student satisfaction^[14] and vice chancellor pay.

And while Australian vice chancellor pay has been soaring, Australian universities have been slipping steadily down international rankings^[15] for university quality.

Inequality is rising

While performance-based bonuses and incentives are common among CEOs and vice chancellors, the same is not true for lower-paid staff.

Instead, these staff are often asked to “do more, with less” even as their real wages have declined. Universities have seen a notable decline in academic staff per student^[16] while the gap between the pay of lecturers and vice chancellors has skyrocketed^[17].

Extremely high salaries for CEOs and vice chancellors have done nothing to boost Australian productivity growth, or our performance in global rankings for our universities, research and development or innovation. Paying out large bonuses for average performance has done little to help either.

Inequality in Australia is rising. As long as CEO pay is rising faster than the minimum wages, that gap will continue to widen. The latest data^[18] showed CEO salaries are 55 times that of the average worker.

Just doing their job

While it is true it is hard to measure the performance of a CEO, it’s also hard to measure the care and attention provided by a childcare worker, the compassion of an aged care nurse, the helpfulness of a call centre operator or the enthusiasm of a lecturer.

Few CEOs think we need bonuses to motivate the vast majority of Australian workers. But it is heresy to suggest those at the top of a big organisation could simply work diligently without a giant bonus.

So, it’s not just income that is unequal in Australia. We expect a lot more self-motivation from those at the bottom of the income distribution than those at the very top.

References

1. ^{^} sluggish productivity (www.pc.gov.au)
2. ^{^} persistently high carbon emissions (www.theguardian.com)
3. ^{^} rising inequality (australiainstitute.org.au)
4. ^{^} among the lowest (australiainstitute.org.au)
5. ^{^} new data (acsi.org.au)
6. ^{^} 0.24% of sales (www.abs.gov.au)
7. ^{^} base salary over $1 million (www.clpgroup.com)
8. ^{^} Will this make energy cheaper? (www.linkedin.com)
9. ^{^} misleading customers (www.energyaustralia.com.au)
10. ^{^} tech_BG/Shutterstock (www.shutterstock.com)
11. ^{^} carbon offsets (cer.gov.au)
12. ^{^} offsets do not prevent (www.energyaustralia.com.au)
13. ^{^} best paid in the world (australiainstitute.org.au)
14. ^{^} student satisfaction (australiainstitute.org.au)
15. ^{^} down international rankings (www.theguardian.com)
16. ^{^} academic staff per student (theconversation.com)
17. ^{^} has skyrocketed (theconversation.com)
18. ^{^} latest data (acsi.org.au)