Monday, January 30, 2012

Christchurch CEO Pay Debacle Continues


National radio provided some interesting listening this morning when it revealed that the 14% increase to Christchurch CEO's pay followed concerning performance reviews. The $68,000 increase granted to Tony Marryatt had already provided a slap in the face to struggling Christchurch ratepayers but the revelation that there was documented evidence of declining performance was a shocker. This debacle highlights two issues in my mind, firstly the need to review the true value of CEOs in the public and private sectors and secondly the quality of decision making processes at local government level.

The most prevalent argument in support of excessive CEO salaries is that there is a competitive international market for competent leaders and if we are not prepared to meet "market" rates we will not attract quality applicants and will lose those we already employ. This line of thinking has led to exploding salaries at the top end and has seen the ratio of the average pay of CEOs and average workers in New Zealand more than double over the last thirty years, from around 7 times the average wage to well over 16 times. When many companies are very secretive about the salaries paid within their companies it is hard to establish the actual ratio and it may even be closer to 20 times. A PhD study by Helen Roberts of the University of Otago found the average CEO pay grew from 11.8 times the average worker in 1997 to 15.2 times in 2002 and given the rate of growth in that period it could easily be well over 20 times now.


We already have many examples of CEO salaries within both the public and private sector defying common sense and reason.  Karen Sewell, the recently retiring CEO of the Ministry of Education, got a $20,000 increase in pay when the ministry she led was one of the poorest performers and at the same time the ever suffering school support stuff struggled to get a 1% increase in pay. Fonterra's boss, Andrew Ferrier, received a whopping 41% ($1.5 million) increase in pay while his middle management were trapped in a wage freeze. Ferrier has been paid over $25 million since he joined the company 8 years ago.


I cannot verify the accuracy of the table below that provides a comparison of CEO/worker ratios in selected countries, but it does give an indication of where we may fit internationally.


Given that this government appears desperate to emulate the US in many areas the table provides a concerning indication of where we are heading. Tim Hunter provides some useful information on what our prominent CEOs are currently earning.

I have yet to see convincing proof that there is a direct relationship between the salary earned and performance and Tim Hunter has revealed that the biggest and most successful companies don't necessarily pay the highest salaries. If we are going to deal to the growing inequities of income we have to provide incentives for our business leaders and linking the median pay of their workers to their own may be the solution. If we arbitrarily set the salary of a CEO at something like 7 times the median pay of their employees then any increase in their own pay could only occur if they can also lift the incomes of those beneath them.

The other area of concern that has been highlighted by the Christchurch situation is the decision making process that led to the pay increase in the first place. It does appear that decision making in many regional councils is not as robust and democratic as it should be and we are often being let down by those whom we elect to these roles. I think the Christchurch situation may reflect the reality for many councils where decisions are predetermined by a leadership group and presented to the council as a fait accompli. Those few councillors, like Tim Carter, who question decisions or want more information are often considered trouble makers, even though they are giving due diligence to their role and doing what they were elected to do. If decisions are made on voting alone and there has been no attempt to reach a consensus then those who voted against a decision will obviously have difficulty supporting it outside council, especially if there are reasonable concerns involved.

The job of  a councillor in a regional authority is an increasingly difficult one given the growing detail and complexities involved in legislative compliancy and the expanding responsibilities and expectations of local councils. Many of those who do the job have to juggle the role with their other jobs and responsibilities and rely on their leadership and staff to provide them with all the information needed to guide their decisions. In earlier times council CEOs were called town clerks and as "government servants" the service element to their role was paramount. With the shift to align local government management to private sector models and salaries there must be a temptation for empire building and self interest to become greater motivational factors. We may find that a return to a culture of service and responsibility may be useful rather than the inflated sense of entitlement that appears to pervade many of our public and private sector leaders.

POSTSCRIPT

Gordon Campbell provides a good overview of the current situation and the difficulties faced by Christchurch people in ensuring good process from their civic leaders.

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