Cover Story Fat Cat Salaries Are they destroying management’s image and effectiveness?

Managers. Are they leaders and visionaries who carry the weight of corporate performance on caring and capable shoulders? Or are they fat cats who justify their existence and over-the-top salaries by creating extra performance hoops for already overworked employees to jump through?
The perception gap between top management’s view of itself and how it is regarded by disaffected employees has always been there. But it’s recently been wedged even wider by revelations of corporate malpractice and consequent focus on the obscene terms of some CEO remuneration packages.
Multimillion-dollar pay packets are attracting shareholder anger, compounding employee disaffection and attracting the attention of restrictive regulators. Are these packages really justified and necessary to attract top talent? Or are they the outcome of self-inflating cycle of competition being pumped by global compensation consultants?
Are boards of directors putting the appearance of success ahead of actual performance in order to impress shareholders? At least one very successful but outspoken American executive thinks so. You’re paying top dollar – you must have the top talent.
The author of the recently released book, Authentic Leader, and former CEO of American medical supplier Medtronic, Bill George says companies get seduced into playing the corporate success “game”. They start believing that if they are paying top dollar (for CEO), then the market will believe they must be hiring the top talent, he wrote in recent issue of Fortune magazine (29 September 2003, p62).
The appearances game is fed by internal drivers such as ego and ambition and external pressure to provide short-term results. The first rule is to concentrate on providing good news for share analysts ahead of genuine customer contentment. Before long, executives start believing their own hype and that of the compensation consultants who work on ratcheting up the individual’s value to the company. It’s slippery slope, warns George.
“The business world has run off the rails, mistaking wealth for success and image for leadership. We’re in danger of wrecking the very concept of the corporation.”
America’s economic bubble may have burst few years back but as one local commentator points out, many CEOs seem to have escaped hard economic times.
“Would you believe average annual pay [for CEOs of major US companies] of US$12 million?” asked Bloomberg News columnist Graef (Bud) Crystal in recent column.
Crystal, himself compensation consultant, has been one of the most vocal critics of his profession’s role in hiking salaries up to point, literally, of no return. As he has pointed out, in several of his columns (in depressing numerical detail) the correlation between stellar pay and stellar performance is non-existent. “The wheel of fortune goes round and round but it isn’t powered by performance,” he adds.
Closer to home and Australian shareholders are angry that recent multimillion executive pay-outs there look like rewards for failure. Even Federal Treasurer Peter Costello has weighed into the debate. Referring to the furore over A$32 million pay-out to Chris Cuffe, former top fund manager for Colonial First State, Costello was quoted as saying he found it “impossible to believe that any executive is worth $32 million”.
Revelations around remuneration that emerged from the HIH Insurance Royal Commission provided more grist for the indignation mill. The A$1.2 million “golden hello” that helped attract finance director Dominic Fodera to HIH was surpassed by the A$1.6 million golden parachute granted by his board just before the company went into liquidation. None of this has done much for the corporate image and proposed legislation in Australia now promises shareholders the opportunity to veto so-called “fat-cat” executive salaries, though not the controversial golden handouts.
But all this seriously big-ticket salary stuff must be put into New Zealand context. When it comes to CEO remuneration we are pretty much the poor cousin. There’s not yet much in the way of multimillion-dollar pay-outs here. The market is too small to afford it. Most of our companies just aren’t big enough to stump up the necessary millions for global high-fliers. But that doesn’t mean management as profession and business is immune to the fallout happening elsewhere, or that we are unable to learn anything from it. Local executives can’t afford to ignore the underlying question: just how much value does management add to any enterprise?

A loss of faith
Local companies may not pay out what could be seen as unearned salaries comparable to those paid in the US, UK or Australia, but there has been recent public flak over some remuneration disclosures. recent article in the New Zealand Herald grumped about Tranz Rail’s senior managers being “rewarded for poor performance” with total $6 million redundancy pay-out likely to be triggered when (or at the time of writing, if) Toll Holdings completes its takeover of the company. Simon Botherway, of Brook Asset Management (a Tranz Rail shareholder), called the situation unsatisfactory saying that “they [senior management] would be rewarded for poor performance”.
Similarly the disclosure of Telecom CEO Teresa Gattung’s proposed remuneration package (totalling close to $2 million) just prior to the company’s AGM last month prompted criticism from Shareholder Association head Bruce Shepphard. His beef: Telecom has, over the past four years, been “increasingly generous to the CEO and her top management while at the same time every performance indicator except gross revenue has got worse”. Telecom chairman Rod Deane however, claimed that the “CEO’s remuneration is market and performance driven” and “in line with Telecom’s position as the largest listed company in New Zealand”.
There are difficulties, which this story will address, in establishing market worth when valid comparisons are so thin on the ground but there is also negative fallout from another vital stakeholder group: employees.
An indication of this discontent surfaced in recent survey carried out by global recruiter Kelly Services which surveyed 5000 individuals in New Zealand, Australia, Malaysia and Singapore. It revealed fairly widespread belief that business does not have its employees’ best interests at heart. In New Zealand, for instance, 29 percent of employees said that revelations about recent bad corporate behaviour had lowered their trust in employers. Older workers were more disaffected than younger ones.
Attitudes are worse across the ditch with 52 percent of Australian workers saying they’d lost faith in their employers. Figures from Malaysia and Singapore were 35 percent and 34 percent respectively.
Surveys like this suggest management risks undermining its leadership role by alienating itself from those it is trying to manage. Talk of functioning as team appears specious when some team members are more richly rewarded than others.
Academics refer to this phenomenon as “Adams’ equity theory”, coined in the ’60s by chap called Adams. It links perceptions of what’s fair and the effect perceived equity has on motivation. And fairness depends on an implicit reference point, or how the comparisons relate to your particular world. For instance if, in your own organisation or department, salaries for senior managers are streaking ahead of workers’ wages for no apparently good reason, there’s good chance employees will perceive this as unfair and feel disgruntled. Employees may be less likely to feel demotivated by the size of CEO salaries in the US. But on the other hand, if our top CEOs look at what their counterparts are getting in the US or UK for similar work, then they might have good cause to feel disgruntled. It all depends on the point of reference.
The split between those at the bottom end of the corporate pay scale and those feeding at the top has grown at fairly rapid rate over the past decade. The trend has bee

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