Incentives for Corporate Executives (ICE) acts like a drug that can’t be satisfied.
Unhappily for the Big Banks, they find themselves in the firing line, under attack to ‘fix’ a culture gone wrong, a greedy culture that has paid scant regard to both clients and good governance.
But is there another conversation about an equally greedy and distorting culture that we’re not prepared to have?
I’m talking about Incentives for Corporate Executives – or ICE. And like that other drug that is threatening our sense of community and family, ICE is an addiction that is corrupting our corporate culture.
Working at the top level of the Human Resources industry in this country, I have seen it first hand.
Many management remuneration schemes promote greed self-interest short-term thinking and poor decision-making. Lets make no mistake; it is the fundamental reason that drives unhealthy behaviours and unhealthy outcomes in organisations.
Numerous research studies have demonstrated that senior management remuneration schemes driven by this type of self-interest do not work. The research from London Business School of Economics has demonstrated “incentives are not the way of the future, if we want to encourage people’s creativity and innovation in solving complex problems”.
Although innovation is the future of Australia according to almost every politician and businessperson, it is unlikely this research will be pursued. Particularly considering the emphatic opposition to a Royal Commission into Banks. Know one, except the masses, wants to unlock the door that exposes the consequences of a system that promotes the rampant self-interest of a few.
A complex and expensive executive remuneration industry has evolved over the last 25 years, which ensures the system is maintained. Those who develop and maintain the system are paid handsomely. Internal HR Remuneration consultants are often becoming the most highly paid HR specialist. In industries such as banking such professionals internal or external are sort after internationally.
The 2008 Global Financial Crisis did not make any effective impact on Executive Remuneration. In fact CEO’s salaries, of the top 50 ASX companies, since the GFC, are almost 100 times that of the average worker. Remuneration consultants were often engaged to modify the remuneration systems to ensure maximum returns in economic downtimes. For example “Share option” schemes being replaced by shares and or less salary at risk.
The chief analyst of the productivity commission researched the remuneration packages of 75 ASX listed companies. It found that “links between total remuneration and company performances were generally unconvincing”. The measures included Earnings per Share, Growth and Return on Earnings. Yet very little has changed.
Australian research also states that CEO’s average tenure is 4.2 years. Fear of short tenure can promote short-term thinking short-term results and promote self-interest.
A recent Bespoke report on Big Four bank CEO packages & pay out’s states that:
“New CEO appointments at NAB and WBC have seen packages reweighted to long-term incentives (LTI). Yet it is interesting to note that the report also states that bonuses are consistently paid “above target”, and in most cases do not reflect LTI outcomes”.
Yet irrespective of extensive research, particularly by our international business schools, our productivity commission, or even applied knowledge of human behaviour, organisations persist with such schemes, that not only don’t add value, but are proven to be counter productive.
Remuneration systems have developed a life of their own. Remuneration advice is now an industry with many people having a cut of the pie. The cost to maintain these systems, consultants, REM specialists, HR resources, REM committee members fees, conferences, are not being challenged while most other costs are.
Incentives for Corporate Executives – or ICE acts like a drug. The more you have the more you need. You have to ensure supply and costly infrastructures, to support the habit and it becomes a never-ending vicious cycle, which promotes the quick fix.
Governments have tried to be implement rules particularly after the GFC. However, with the power of the corporate dollar and remuneration specialists rules can be circumnavigated and rules can have unintended consequences.
For example one factor that has driven up executive salaries is executive salaries being communicated in the Annual Report to assist with transparency. Inadvertently in some instances it has become a bargaining tool for executive’s to push up their salaries. Capping remuneration payments to one year’s salaries can be a great way to prolong an executive’s career as an external consultant.
Executives and boards may resist, rationalise or even deny there is problem. Others may admit the addiction is real, however don’t know what to do to change the system. Those who benefit from the pots of gold, like any of us, are unlikely to be advocates to change the remuneration system that benefits them.
For things to change and our society to prosper there has do be independent enquires which can focus on the root causes, like remunerations systems that drive unhealthy and short-term behaviour. Anything else will be papered over.
Anytime there is such potent outcry of condemnation, like having an independent enquiry such as a Royal Commission into our banking industry, one has to ask what is really in it for them or others not to do so? What addiction wont they give up?
