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The Forum > Article Comments > Reforming CEO pay > Comments

Reforming CEO pay : Comments

By Andrew Leigh, published 9/5/2011

If a good manager can increase the return on assets by 3 percent, should we worry about another million dollars worth of pay?

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There can be illusionary improvements in efficiency.

Basically it involves reducing ongoing maintenance costs and rather than being proactive, it is reactive instead.

Replacing equipment when it fails, case in point is the current power line grid, at present the consumer is going to be charged for work to repair and upgrade the grid.

Work that before privatisation would have been undertaken as a part of routine maintenance. Instead routine maintenance work was cut back, and subsequent reduction on the number of employees, and 'Whalla' like a magicans slight of hand, costs were reduced and paper profits increased.

Greater return to the shareholder, bigger pay packet for the CEO.

Only one problem at some point in the future, the neglected power grid will need some expensive work, in a very short period of time.

Problem solved, we'll get the consumer to pay for the work, that should have been undertaken by the company.

Then add on a profit margin to the work, again bigger return to the shareholder, and CEO and increased costs to the consumer.
Posted by JamesH, Monday, 9 May 2011 10:04:00 AM
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"independence of remuneration consultants" - what will that achieve, when they will still be drawn from the ranks of those who view million-dollar salaries as a just reward for competence?

What is needed is that committees overseeing executive renumeration levels should be drawn from the ordinary shareholders - and by this I mean, where shares are owned by some share fund, the individuals who own the units in those funds.

Or, indeed, anything to ensure that the salaries are set by people who actually know about salary levels in the real world.
Posted by jeremy, Monday, 9 May 2011 10:30:24 AM
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James has nailed one of the big problems.

The real costs of getting that short term increase are not always visible.

The long term impacts of minor shifts of expendature can be dramatic down the track but may look good for a while.

The power grid where maintenance and a reduction in redundancy is a classic. Many real problems with a lack of maintenance won't show during day to day running but put in a severe weather event and it's chaos.

The lifespan of some very expensive equipment such as power traqnsformers can be massively reduced by overloading it for even short periods (http://www.usbr.gov/power/data/fist/fist1_5/vol1-5.pdf).

The build/replace cycles for much of the network is measured in decades so a manager who chooses not to invest in maintenance and who uses up the margins already in the system may see a dramatic return improvement in return on investment at the expense of the future of the network.

The human cost of some increases on return on investment also don't always show on the book's, a manager who treats long serving staff as disposable items may get away with it for a period but longer term the organisation misses out on the local knowledge of those staff and any sense of loyalty by those who remain.

Likewise companies which don't invest in new technology may do far better for a while than their competitors who are putting a lot of money into the next generation of product. They probably won't do so well when no one is buying the old technology anymore.

The big bonuses if they are to be paid should be paid well after the period where the initial returns are found. What's the health of the company five or ten years after the management decisions were made?

The issue is also clouded by taxpayer prop-up's and assistance to companies which fall on hard times. It's not just about shareholders making their own choices.

R0bert
Posted by R0bert, Monday, 9 May 2011 10:46:47 AM
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Mr. Andrew Leigh, Lawyer, PhD, Professor, Honorable Member of Parliament, thanks for filling our mug with the profound wisdom you accumulated in that fantastic world of ascendancy known as University.

However we, humble servants, do not understand how the CEO who gets as much money in a year as an average worker gets in the course of his/her working life, spends it.

And, isnít the money that Banks rent, the source for increasing their bulk of money and their ability to increase it further.

Now, if the CEO of a bank takes home a chunk of that money, doesnít he/she diminish the bank ability to make money? What does this mean to the bankís depositors and clients?

When from money we go to the substance it should mirror, Wealth; can you please tell us how the shuffling of money by the banker produces wealth for the depositor, the client and the banker? Arenít in this game two losers and one winner?

Sir, how can one, according to you, distinguish the CEO of a bank running home with a chunk of money from Bernie Madoff, Michael Milken or Richard Pratt that in this article you ultimately celebrate?
Posted by skeptic, Monday, 9 May 2011 5:55:06 PM
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And another thing;

Mr. Andrew Leigh, Lawyer, Economist, Professor, Member of Parliament, hence Honorable, are the bankers Honorable in lending the savings they have in trust from people to Bomb-makers, whose products kill people?

Did teachers fail to tell you the ultimate significance of your uniform when you lined up in the school yard to sing the national anthem?
Posted by skeptic, Monday, 9 May 2011 6:32:25 PM
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Robert there was a certain individual working in biomedical engineering who would move from job to job, his tactic was "I can save you heaps of money, in my last job I reduced costs by..."

He would stay about two years then move on when things started falling apart, because of lack of routine maintenance.
Posted by JamesH, Monday, 9 May 2011 9:56:15 PM
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