There’s been a great deal of outrage over executive pay and bonuses over the years, and particularly in the wake of the GFC. In the United States, the issue of the day is the bonuses to be paid to the very people at AIG responsible for destroying the company, requiring the US government to bail out the company to the tune of 170 billion US dollars. In Australia, the issue comes up periodically, as noted by this story on 7.30 report. However, proposals for actually doing anything about it have been few and far between, and tend towards the ineffectual – like giving shareholders a binding vote on executive remuneration – or the impractical – like a binding cap on executive compensation which simply isn’t going to work unilaterally.
However, the 7.30 report story pointed to an approach which might actually solve one of the major problems with executive remuneration – that it’s excessively geared to the short-term performance of the company (and sometimes, not even that), allowing chief executives to stuff up, receive massive salaries, bonuses, and often termination payouts, and leave shareholders sitting on losses. Regnan, a governance advisory group owned by a number of Australia’s biggest institutional investors (notably including several government employee super funds, BT, and index fund manager Vanguard), has a proposal which might go some way to fixing this.
They propose a number of reforms, but by far the biggest is that all remuneration above a certain threshold – be it salary, performance bonuses, and termination payouts – must be taken as shares in the company. These shares are held in escrow; with 20% of them vesting (being transferred to the executive who may then sell them) after 5 years, 20% after 6, and so on up to 9 years. The proposal doesn’t specify the absolute level and mechanism for deciding the amount of remuneration – if the board wants to determine performance bonuses based on the number of Facebook friends the CEO has, that’s their perogative – but the form of that remuneration is fixed.
Now, this doesn’t solve the problem of excessive income inequality at the top end, which is not exclusive to CEOs and is better handled with taxation. But what it would do is save boards from themselves by forcing them to pay their executives to achieve in the long term, not the short.
The only problem is that the Regnan proposal has no teeth. The threshold above which all pay must be in the form of long-term shares is entirely up to the board. Furthermore, the proposal allows boards to
…use discretion in the application of the proposed remuneration reform. Examples of discretion include; offering alternative forms of equity to be held in escrow via the XSOP, changing the vesting period of the XSOP, or allowing XSOP tranches to vest early (for example, in cases where the board changes the strategic direction of the company after an executive has retired). In cases where the board has used its discretion, the details and rationale for that discretion should be disclosed to shareholders using an “if not, why not” statement as is required of companies adhering to ASX Corporate Governance Principles.
These two weaknesses appear to transform the proposal into little more than a recommended code of practices for boards setting pay deals. Theoretically, good corporate boards should already be aligning the executive pay to the long-term interest of the company. If they’re not (and it’s become pretty clear that they’re not), often because they’re supine to some combination of the Chair or CEO, the “if not, why not” statement will become a routine feature of every publicly-listed company in Australia, with the “why not” being some variation of “we need to attract top candidates in a competitive international market…” But, still, it wouldn’t be hard to turn it into a real reform proposal, by coming up with a rigid formula to fix the cash payment threshold – as a discussion starter, perhaps 20-30 times median full-time earnings – and make it much, much harder for boards to use discretion to get around the system.
There are undoubtedly downsides to this proposal. For instance, it probably won’t reduce total remuneration of top executives and might actually increase it, because they’ll demand a greater stake to compensate for the greater risk to their income (as noted, I reckon the best way to deal with this is tax, not legislated pay limits). But it might solve some of the problems with executive pay that have become ever more obvious over the past couple of decades. As such, it’s at least worth a serious look.
Better to do vested stock options – they can expire worthless when you screw up. The biggest problem with this approach (that it requires your company to go public) isn’t addressed, neither is the overhang/stock dilution of the suckers who bought the stock in the first place only to have their holdings eroded by a renumeration practice that requires the issuing of more shares.
The specific AIG example was just mishandled – AIG complaining that they were contractually obliged to pay bonuses is pretty weak when your company is technically insolvent. As soon as that objection was raised, the Feds in the US should have simply withdrawn the offer of capital. I’m sure we’d find out just how strong those contracts were very quickly. At the very least, AIG could have been forced to issue internal fines for incompetence.
I reckon a better idea would be to have Executive salaries and remuneration decided by the shareholders of the company. The big problem is (and the Regnan proposal likewise) that the government has no legal basis to intervene in the dealings of a private company. When someone can find a way around or through that then we might get somewhere.
Sure it does, Jamo. As Workchoices established, the Commonwealth’s corporations power allows all manner of top-down industrial relations jiggery-pokery, for better or worse.
The problem is using the power of the Commonwealth effectively, not whether it can be used at all.
What about Section 51(xx) of the Australian Constitution? I thought that was the catch all that allowed pretty much any corporate regulation.
Yeah, sorry. Nevermind.
The 51(xx) point is a good one. In that spirit, an amendment to the Fair Work Bill is to bemoved by The Greens (probably today).
The amendment, ably summarised at Workpace Express, seeks ‘to address the recent concern about companies with high executive salaries making their employees redundant, via an amendment that renders a redundancy non-genuine [and hence an unfair dismissal] if the employer pays “excessive remuneration”, which the amendment defines as more than $500,000 a year. However, the amendment gives FWA the power to make an “executive high pay authorisation” if it is satisfied the remuneration isn’t excessive.
The amendment provides the following criteria against which FWA can determine whether pay is excessive:
-community standards of reasonableness of remuneration;
- the extent to which the remuneration paid to the person by the employer could be, or has been, reduced so that the employer could avoid:
* terminating the employment of any person because of, or for reasons including, redundancy; or
* standing down any person under subsection 524(1);
- the need to encourage the ongoing employment of the maximum number of people;
- the ratio of the remuneration to the average weekly wage;
- any other matter FWA considers relevant.’
.
In other words, no redundancies until excessive pay is reduced. Only a partial response, to be sure, but important in the current climate.
But why? How much of their own money shareholders choose to pay their employees seems to be a sideshow. We seem to need to blame something, anything for the empathy we feel towards people who have lost their jobs. It’s difficult to hang that blame around the neck of market forces, we certainly don’t want to blame ourselves – no one wants to face up to the fact that the reason Bonds &c are taking manufacturing overseas is because we, the public, prefer underpants cheap – and most of us don’t want to admit that we all devoured cheap credit rather than question how it could be so cheap and plentiful. So instead we dress up executive pay in goat’s clothing.
I deeply empathetic to sacked employees; their position truly sucks. However micro-managing salary packages seems a weak way of showing it. Just how many jobs could have been retained in Australia if Pacific Brands had paid Sue Morphet half a million instead of 1.68 million? Ten? Fifteen? They shipping 1700 jobs overseas.
True Gilmae.
What’s more, compulsarily tying CEO packages to performance via share price makes it less attractive for them to retain their operations in Australia where labour costs more.
Gilmae: I happen to think the PacBrands outcry was largely a crock – every sympathy for those workers who’ve lost their jobs, but they were just a high-profile case of what’s been going on in the TCF industries for two decades now, and was going to happen recession or no recession.
However, there are real issues with executive pay, which has been increasing out of all proportion to GDP growth and corporate profitability, and with no evidence that it’s actually providing any benefit to the people paying the salary.
Adam: that’s not going to work, and you know it.
Robert Merkel, what about my idea @ 2.
Jamo: the evidence suggests that boards are clearly not protecting the interests of shareholders, by getting suckered into pay deals that do not encourage the long-term growth of the company.
Robert the proposal assumes that directors and shareholders generally are more concerned with long-term performance than the CEO, who is more interested in short-term profitability. I don’t seen any reason why that assumption should be valid. The day-trading mentality that now afflicts virtually any kind of investment means directors and shareholders may actually be MORE likely to focus on a fluctuating share price than the CEO. At least the CEO has some human interaction with staff; many shareholders and directors only want to see a quick increase in the share price so they can sell the bloody things and buy something else.
Robert: And? Who cares if there is no benefit to the shareholders. If they’re unsatisfied, form a voting bloc and change the board. Or sell their shares.
We should only care if it is detrimental to a big chunk of others. I don’t think I’ve seen that yet; well, except for guarding the public morals thing @6.
And that’s where the self-interest of the owners of Regnan comes in, as long-term investors.
That said, I think there’s a pretty strong case that catering to the needs of day traders doesn’t serve the interests of anyone except day traders, and probably not even them (it’s a negative-expectation gambling game).
Won’t ‘work’? The ‘no redundancy while excessive remuneration’ is no silver bullet, Robert @ 9, but Regnan’s isn’t either, a point effectively admitted when you perceptively note “this doesn’t solve the problem of excessive income inequality at the top end, which is not exclusive to CEOs and is better handled with taxation.” I wasn’t offering the two solutions as comparable, just drawing a temporal and topical connection. But the FW Bill amendment at least has some teeth (or is intended to) and is aimed at intra-company income disparity, unlike Regnan’s proposal.
Doesn’t this all beg the question about the ‘problem’? My guess is that the ‘outrage’ you refer to is less an expression of concern about saving companies from themselves than about wealth disparity. After all, it isn’t even clear that high remuneration is the cause of corporate failure. And can’t many shareholders just invest elsewhere, having infinitely more flexibility than those who work within the enterprise and create the value for the company? And what, under Regnan’s proposal, limits a simple increase in executive remuneration?
Until income inequality is dealt with through taxation, will any measure ‘work’?
Personally I reckon big salaries are a bit of a red herring.
A far more relevant issue is the lack of accountability re general operations of corporations and the blind acceptance, until recently that is, of their self serving dogma.
Why bother fiddling with one tiny aspect of what they do, go the whole hog and subject them to much tighter scrutiny and control in ALL the arenas of their operation.
After all the basic moral of the GFC story is that lack of government control and regulation was a fundamental cause of the giant stuff up.
Because all people suffer when they screw up, we all have to pay for their running costs and profits, our workers suffer as does their communities when they sack the people who did not cause failure.
The tide has turned, the pundits are now reluctantly admitting the corporate ideology was, and therefore is, wrong and we now as a rule of thumb should at least consider doing the opposite to that which was done over the past few decades.
-Free trade? Change direction.
-Unfettered markets? Haul out the chains.
-Privatisation? Lets take equity and control. Nationalise, comrades!!!
-workNOchoices wage control? Increase union powers and influence and cut executive salaries [my personal leaning is towards non tax deductible [by the corporations] increases in personal income].
-Regressive taxes eg GST, capital gains? Go for progressive taxes, much higher income tax rates at higher levels just for starters.
Now I’m not saying that each and every one of the above is necessarily the way to go.
But we have been sold a series of very sick pups over the last few decades and they have all gone belly up in the last year or so.
The right wing agenda was a disaster.
So at least lets consider the alternatives that should have been voiced previously.
In his “novel” The CEO, Peter Ralph, a former stock broker in Melbourne tells “A calculating, ruthless CEO of a public company is determined to turn the business around and make his fortune, no matter what the cost. A suspenseful thriller.”
ISBN: 9781877096952 (pbk) An easy read available at the Port Phillip library.
The book describes how our “hero” sacks employees and borrows to the hilt to get his bonus, with no regard for the company he runs into the ground or his workers. Much like Sue Morphett at PacBrands.
So yes I want to see limits placed on executive remuneration and the Regnan solution sounds elegant as it addresses the corporations long term financial viability, which is a concern for smaller shareholders who rely on their dividend income to live. If rapacious executives aren’t reined in all self funded retirees will end up destitute on the old age pension.
Any corporation getting government money shouldn’t be paying their executives more than we pay the Prime Minister. If the executives are better than the prime minister they don’t need government money
The federal government would be stupid to get between shareholders and management over salaries. I mean, even stupider than I think they are.
There’s the problem, “technically insolvent” isn’t “insolvent”. There’s only one way of weaseling out of inconvenient contracts, and that’s real insolvency followed by bankruptcy.
If AIG was in bankruptcy, all obligations could be renegotiated, but while it’s in this walking undead state it’s a real business with real legal obligations. This is the dilemma for the US government – be seen to pay out ridiculous bonuses, or be seen to let AIG fail and cause the market chaos that follows.
It will take the lesser of two evils and allow the bonuses. Legislation may follow, but too late for AIG.
Adam: I think the Greens proposal is: a) a stunt, b) an administrative nightmare, were it ever to be implemented, and c) too much interference in the way companies run themselves.
As to your point about wealth disparity, it’s more complex than that.
I agree that excessive income and wealth disparity is bad. Furthermore, I believe that the gains relative to the rest of us that the top end of town have made over the last couple of decades are essentially unjustifiable. However, trying to claw it back with piecemeal measures like salary caps for managers imposing redundancies is going about fixing the problem in the wrong way. The tax and transfer system is the place to claw it back.
But I think there is particular outrage at CEO salaries for failing companies. If a star sportsperson stops winning, they stop earning money. When a CEO stops making money for their shareholders – the people that, theoretically, hired them – they still seem to collect bonuses and massive termination payouts.
Well, they do when their contract finishes.
That’s because the current executive system gives incentives to people who can negotiate a good employment contract (through negotiation skill, contacts, etc), not those who have any idea about how to run a company. Much in the same way the current business system gives incentives to companies that can screw over others the most rather than provide incentives to those actually being productive.
CraigMc might think that shareholders should be able to control their executives. If CraigMc works in Australia he has to pay 9% of his pay into a superannuation fund. Unless he is earning over $100,000 he is most likely to be contributing to a retail or industry superannuation fund. Most Australian Superannuation funds invest at least a third of their money in shares traded on the stock market, all super funds have an exposure to BHP.
Can CraigMc influence how much money the executives of BHP pay themselves? Can I? No, so we need regulations to control the behaviour of corporations. BHP is not going to leave Australia over executive remuneration.
AIG are a bunch of unprincipled pirates or ‘robber barons’ who deserve to be locked in gaol.
The sooner AIG is nationalised or liquidated the sooner the USA can start to rebuild their economy to a shadow of its former glory.
Given that BHP Billiton has head offices in both Australia and London as a result of the merger its perhaps not the best example to use
Shareholders have every incentive to extract from their top executives the highest level of performance for the lowest possible price.
The trouble is, members of boards of directors represent in name only the most precise interests of shareholders in this matter.
Executives and non-executive board members are members of a self-perpetuating cabal of high-fliers whose personal interests run counter to the interests of minority shareholders.
However, it must also be noted that the salaries of top executives in large corporations make up only a small part of the running costs of those corporations. If they worked for no pay at all, distributing their incomes to the shareholders would add only cents or even fractions of cents to dividends per share.
The problem with emoluments arises when pay and bonus payments encourage short-termism and/or reckless behaviour by executives, who are, after all, only employees.
The rest of the debate revolves mostly around envy and resentment, as unacknowledged as those sentiments may be.
If AIG were liquidated, the world’s financial system may well collapse.
This may be a good thing but it is important to appreciate the stakes in Obama’s efforts to enable AIG to meet its contractual obligations to some of the most important and some of the most fragile institutions in the world financial system.
Yes and yes. I can run my own fund and choose where I invest it. If enough investors disapprove of BHP’s arrangement their price will suffer. Conversely, if their price doesn’t suffer, then the market approves of it.
Katz: if having concerns about showering extreme wealth, essentially randomly, on a tiny fraction of the population is envy and resentment, colour me envious and resentful.
Otherwise, good points.
I particularly hate this “put it in the hands of shareholders” as if it’s represents some kind of democratic solution. In reality the majority shareholdings are usually taken by institutional investors (i.e. a minority) who are always going to back the status quo.
How many times have you seen issues taken up at Shareholder meetings only for them to be laughed off by the “majority shareholders” (rather than the “majority of shareholders”).
I still squirm anytime someone trots this one out implying Capitalism = Shareholders = Democracy as if it was all one big happy family. Of course, in reality what we have is a Narcassitic Oligarchy.
There’s a simple solution for anyone who considers a company’s executives are paid too much. Sell.
If you don’t sell, then you’ve effectively said the curate’s egg is good enough.
Well Craig Mc that presumes that (1) you can find out what they are actually paid and (2) there are shares in alternative firms available where the executives are NOT overpaid.
Both presumptions are open to serious question.
I heard one suggestion that for all bonuses and performance awarded to execs, an equal (or multiplied?) amount should also go to the worker bees for having contributed to such an excellent result!
Over at JustOneMinute, some interesting further angles and pieces of the puzzle re the AIG bonus business. For instance…
“…And do keep in mind – this is not an “incentive” bonus pool, it is a “retention” bonus pool. In the spring of 2008, after AIG eased Joe Cassano to one side and realized he had presided over a train wreck, they had a serious question about whether they should remain in the derivatives business and how they might keep a derivatives team together. Rather than watch as everyone drifted to other firms they guaranteed a bonus pool (it was generally obvious that earnings wold not justify bonuses in 2008).”
http://justoneminute.typepad.com/
There are a couple of long, details-filled posts which shed some further light on the mess. Worth a read, if you like to get your news Cubist-style, as it were.
My guess is that the ‘outrage’ you refer to is less an expression of concern about saving companies from themselves than about wealth disparity.
Not from this man, Adam. As a rule, Republicans don’t have a problem with wealth disparity.
the majority shareholdings are usually taken by institutional investors (i.e. a minority) who are always going to back the status quo.
Well, in general. The ethical funds[1] are not really big enough to buy in and change direction. Yet. And it used to irritate me that the available funds were so utterly impervious to anything outside the bottom line. So I switched the instant I could (15+ years ago). But regardless, getting anything changed is still a huge amount of work and small shareholders are just along for the ride.
[1] who says greenies can’t do marketing. “Ethical investment” is absolute marketing gold… I mean the alternative is what, unethical investment?
In 2000, a 1909 Honus Wagner baseball card sold on eBay for $1.265 million. That strange portrait of Mona Lisa with its rather silly background is probably priceless. And a small set of executives have salaries and bonuses in the tens of millions. None of them are worth the money except in strange markets that value their rarity well above any intrinsic worth.
Chances are there are many thousands of people with the people skills, product knowledge and technical know-how to be equally effective CEOs of the large companies, but only a few are genuine ‘collectables’. And those few are fought over by the big companies in a desperate bidding war, with the penalty for the losers being huge short term drops in share prices. Of course the celebrity execs are not worth it – invariably they’re just a dangerous mix of a few skills and a lot of bravado, who’ve been on a lucky streak so far. But then the baseball cards aren’t worth it either.
What amazes me is that they even want such huge salaries. Do they really think they’re worth more than a Booker prize winning author, a cardiologist, a Prime Minister? But they seem curiously untroubled by such reflections – they’re greedy hands go right on reaching out for more. Even after they’ve plunged their companies into receivership. So why is it the masses despise politicians, public servants and lawyers when there are infintely better targets available?
Just been half-listening to Insight where Pacific Hydro said that they had projects ready to go if they could find investors. In my corner of the world we are green but do we have access to vehicles to invest a portion of our savings in green industries or infrastructure projects without the rapacious Macquarie or Babcock & Brown? I think that investor sentiment is often a lot further ahead than the financial industry.
Despite the rhetoric and legislation many workers find that they will get rostered on if they contribute to the employer based super scheme. Low paid workers who want to run their own funds don’t get rostered on.
Low paid workers running their own super funds? It costs at least a couple of thousand a year in compulsory audit and reporting requirements for self managed funds. Or maybe we have different definitions of low paid
Would it be right that the prospect of these huge payouts makes people leave these jobs quicker? And that in turn lessens their sense of long term responsibility to manage the firm properly? I’m sorry to ask such an ignorant question but while I’m at it here’s another: How many of these kinds of big executive payouts happen in Australian companies each year? The examples given on the 7.30 report were pretty grotesque but are they isolated?
If the shares in the company can’t be touched for a couple of years (the time most cultural/restructuing efforts from the top actually flow through to the long-term bottom line), then that would be a good thing.
It won’t work for private companies though… but again, some delayed gratification (and adjustment up or down once the real effects are clear) might help.
Personally, a system that worked to delay (and adjust up or down) exec payments in private companies would work for publically-listed ones. The problem with shares is that they can plummet even in companies that had been well-run if the market as a whole collapses, punishing a good exec for the sins of others.
Remember too that succession planning is a very important part of the role of a CEO… so if the successor botches everything, the previous CEO must have some of the blame.
Laura wrote:
No – the rich well paid execs, stupid as this sounds, have cashflow issues of the same kind as the poor, only on a larger order of magnitude.
It’s the uber-rich, tiny elite of capital owning layabouts who don’t worry about money. You wouldn’t believe the stories of just how much money is wasted in the executive class trying to act like the properly monied class.
The Americans have a delightful term (your “nut”) which describes the self imposed hurdles that the executive class put in front of themselves with massive mortgages, motor vehicles, exclusive schools, mind bogglingly expensive hobbies (yachts, polo,coke,holidays,mistresses,classic cars,clothing) and the rest of the “expected” trappings of wealth they feel compelled to display.
What AIG rather laughingly describe as retention bonuses are the only thing which saves your average derivatives trader from bankruptcy every year. Usually they’ve spent next years bonus a month after they get this years.
Chris a low paid worker with a SMSF may have been a high paid worker who can’t access their SMSF until age 55 who is forced into low paid work.
It depends on what you mean by “leave”.
If it means that they seek to opt out and become hippies who have escaped the system and who seek merely to live a life of independent ease, the answer is no.
Mostly these types are workaholics driven by the need to climb the greasy pole to the top of the highest and most challenging corporate tree. When they leave a job it is usually with the intent of taking on a bigger job. Opting out tends to be an admission of failure and severely erosive of status and self-esteem.
I meant leave and get another similar job rather than get out of the field altogether, thanks Katz. Hadn’t considered that going on to a job that doesn’t pay more than the previous one would read as failure. That’s got to contribute to payout inflation too?
billie @ 43 – ah, true. I’m a bit surprised by how many SMSF there are out there. And given how large a SMSF has to be to be worth it if people are in low paid work then their super fund is probably generating more income than they are by working!
Personally I think the major problem is disparity between risk and reward.
If the rewards won’t come down to a reasonable level, then maybe the risks should increase. Withdrawl of LLC status comes to mind. Needing to prove to anyone who asks, beyond a reasonable doubt, that you were worth your pay packet just becomes another necessary CEO skill.
I mean, I wouldn’t advocate some kind of reality TV running man like CEO termination package program. I know I’d watch it.
This clipping of top end salaries is going to really hurt partners in “deep carpet” law firms, likewise for accountancy, never mind medical specialists.
Robert, I’m wondering about the Regman proposal (say, with teeth) and what The Buck Stops Here: Private Sector Executive Remnueration In Australia, 2003 suggested took place in the US in the 90s, and whether it’s possible we could end up seeing similar consequences in Oz? (Exhibits 1.12 and 1.13 are definately worth a look)
Legislation designed to limit the growth in US CEO pay may have unwittingly contributed to the greater accent on option-based wealth acquisition during the 1990s. In 1993, the Clinton administration responded to a growing public furore over run-away executive pay by implementing a series of legislative measures intended to rein in the growth. Cash payments to individual executives in excess of $US1 million cannot be claimed by companies as tax deductions. However, performance-related pay is exempted from this cap where the performance goals are explicit, established by an independent compensation committee, and approved by shareholders. The overall effect of the tax exemption limit has been quite perverse. While the intention was to rein in growth in executive pay, the effect has been to encourage a move to non-cash incentives, particularly share grants and share options. The move also lost the US government vast amounts of tax revenue.
“as a discussion starter, perhaps 20-30 times median full-time earnings”
I still prefer 30x the *lowest* paid employee
Oops, frigged up that link: The Buck Stops Here: Private Sector Executive Remuneration In Australia, 2003
OT but. I recently and unwittingly stumbled upon what I suspect is a long term tax … minimisation scheme, involving the agistment etc of a recurring, over the years, number of equine clients, who on further investigation I discovered appear to be largely deceased, M.I.A. or exported. I had been asked to give a breakdown of ‘on farm’ equine beasties into their various categories, wet/dry/spellers/racers etc for the preceding three months. Fifteen names came up in my somewhat eccentric though to me obvious enquiry into the software program we use, under er . . ‘agistment charges’. I had never heard these names which also stood out because they had been recorded in uppercase, long, ago. Why would they be showing up in agistment charges ten years later and as it turns out, throughout that time? I alerted my superiors to this anomaly and was met with terse irritation and a demand to know where exactly had I got this report. Like I said- “Reports”-”Agistment Charges”- Voila. Not a query anybody else had thought to make it seems. I didn’t mention that I had dug a little further into more specific information from the ASB (australian studbook) into these unknown horses and now knew them to be for the most part, largely or entirely dead. I should shut up about it eh? I am just the temp girlie who finishes up on Friday and is headed for the short-term, (fingers crossed) for the dole queue. I bring this up to purge myself of this knowledge and announce it to the world at large. I wouldn’t really like to think I had been instrumental in someone possibly going to jail. It is probably assumed I am too gormless to realise what is going on. My employer who I hardly ever see is too all intents and purposes obscenely rich and according recent media accounts is only just managing to stay one step ahead of the tax man, this would probably be the nail in the coffin for him. Thank you for listening.
Chris you seem to think very few people would be in the position to have amassed reasonable sized SMSFs yet be too young to access pension and unable to continue working full time. Many high paid contract workers in IT, Mining, Construction etc will be struggling to find work because of cyclical and structural downturns in their industry. Depending on their accountant they might be able to access their super early, then again they might have to move into another field and that’s when you discover that the right to run your own super fund is really at the employer’s discretion. Have you tried to contact the Superannuation Ombudsman, I have, and the office would not answer the phone, over a 1 week period.
SATP: I doubt medical specialists are going to cop it too hard, with the possible exception of cosmetic surgeons.
It’s possible that the proportion of (less profitable) private patients will go up a bit, but people don’t stop getting crook just because there’s a recession on.
Nick @ 49 – wouldn’t that lead to a lot of outsourcing of low paid jobs?
billie @ 52 – As I said I’m a bit surprised by the number of SMSFs in total, let alone those that may be run by low paid workers. My understanding is that it takes quite a bit of time, effort and expertise to do right and you need to have amassed at least around 200-300k in super first for it to be worth it from a financial point of view.
I’d always presumed that SMSFs were primarily run by the rather wealthy, some small businsess people or those with specialist knowledge (were investment advisors/accountants anyway). But perhaps I just live in a bubble and its more common than I thought.
Working schmoes like me have them, and they tell me you don’t need more than $100k. These are people who like to think constantly about investing anyway, so it’s probably better suited to enthusiasts.
Everyone:
Look on the bright side …. this whole shemozzle has brought the rorts and swindles and give-aways out into the glare of public scrutiny.
Never, never again …. perhaps?
Meanwhile, I’ll just get a few empty 44-gallon [200litre] drums and a few lengths of appropriately knotted inch-and-a half [38mm] manilla rope together and find a tree with a few strong low branches …. now, where are all those criminally-incompetent, grossly-overpaid CEOs AND their supporters?? They are all invited to a sort of a dance party ….
Strange bag-o-fruit instead of Strange Fruit, Graham?
(yes, it’s a pun that made even me groan)
Graham, I was about to comment on the poor taste of leaving generalised death threats, but then after a bit of thought, realised that it’s becoming more and more the common sentiment.
Here’s John Robb:
Graham Bell @ 56
A bit over the top, Graham. In these climatically-challenged times, we need to look after our trees better than that.
Chris @ 54, how many low paid jobs could a large company realistically outsource (ie. jobs they’re not already outsourcing)?
billie @ 52, I would thought if you really needed the work, there’s an easy enough solution. Don’t tell the employer you even have a SMSF (it’s none of their business), and just join their fund as an additional super fund for the timebeing.
I can’t believe they’d seriously expect you to roll everything over to them, especially before signing you on? An employer never has any way of knowing which potential employee has $800,000 of super and which has $20,000, so, in any case, that can’t be too important to their selection process.
Robert Merkel #53. I respectfully suggest that it is possible this comment is waaaay off the mark:-
“I doubt medical specialists are going to cop it too hard, with the possible exception of cosmetic surgeons. It’s possible that the proportion of (less profitable) private patients will go up a bit, but people don’t stop getting crook just because there’s a recession on.”
Doctors however, may stop work if they are not paid.
Medical professionals with high incomes (say a husband & wife with a colo-rectal practice) who wake up one day to discover the nation has imposed confiscatory taxes on income above $250,000 will stop working so ruddy hard. They will (especially the wife) opt for more family time, and see only sufficient patients to keep their income at the envy-inspired threshold.
If working 60 hours a week brings $250,000, why work 120 hours only for most of the extra income to be confiscated?
How would they even know it’s self-run? Not that they have a choice in the matter – they’re mostly obliged to provide employees with fund choices, and that means their choice – not the employer’s.
Well, the law is one thing, enforcement is another. That sucks. I suggest writing a letter to your local federal member.
Billie, the Superannuation Complaints Tribunal really only deals with the behaviour of super funds themselves, not your employer’s refusal to pay into your SMSF (is that right?) It’s the ATO who deal with the rules about employer payments.
CraigMc has good advice, if the ATO can’t or won’t answer your question, you can have your Federal MP make a representation on your behalf.
SATP: I thought you were talking in the context of the recession or executive pay limits, none of which much affect medical specialists.
As far as punitive taxation discouraging doctors from taking patients, the short-term solution is doctor importation and incentive payments. The long-term solution is training more bloody doctors. It’s not like there is any shortage of suitable candidates straining to get into the country’s medical schools.
Robert, Medical specialists who operate their own practice will most definitely be affected by executive pay limits.
They are the executive of their own company.
The jealousy of voters who wish to limit the income of others (in this case CEO’s) will see some very unintended consequences.
Quite a few with the right incentives for the executives I’d imagine – eg most of the staff at fast food restaurants supplied by independent labor hire companies rather than employ them directly. And it would be even more incentive to move jobs like call centre staff overseas.
I don’t think there’s too many doctors who earn over 30 times the median wage, SATP.
Also, if they’re incorporated as a practice, it’d be no skin off their nose to be paid in shares instead of wages—as Pub Steve said, they’re their own company.
Chris, if it was more profitable, they would already do that, and of course many companies already do that.
Many companies also own significant shares in the labour-hire companies they exclusively source from – so a portion of the 15-20% garnished from your wage, is actually going straight back into the company’s pockets. That particular problem is rife in London throughout the larger reception/secretarial agencies.
So what if it’s not already profitable? To revisit Katz point @ 26:
“However, it must also be noted that the salaries of top executives in large corporations make up only a small part of the running costs of those corporations.”
Do you think a public company (remember we’re talking about public companies with CEOs who earn $1million in salary a year, otherwise they fall within the 30x anyway) would realistically outsource 100-500 employees – at a relatively huge increase in running costs – just so the CEO can earn a *few more hundred thousand* dollars a year?
According to the ABS the before median income is $860pw, $44720pa. Robert is proposing a cut off at 20 times that for salary capping, around $900,000pa or a little under. If one were writing such a rule I suspect the round, rolling loveliness of $1 million would end up being used.
There are occasional medical practitioners earning that kind of money but most of them run significant, multi-site businesses such as Radiology or Pathology companies. The median incomes for procedural specialties are (from memory) in the $300K to $400K range with non-procedural specialists a little less. The range is fairly tight, especially in public practice, so that people earning large amounts more have to structure their practice aggressively to do so, sometimes on the margins of legitimacy in terms of billing.
In rural areas the grotesque glut of work that needs doing may lead to remuneration commensurate to that load, perhaps brushing up against the $1 million in those terminally unable to get home to bed.
Just framing the issue on specialist incomes, not trying to comment on appropriateness or otherwise of the measures under discussion.
Nick @ 69 – didn’t you say you’d prefer 30x the lowest paid employee? So take the example of a firm which hires young adults or apprentices. That would put the cap at around 600k. Do you really want to provide an incentive to not hire apprentices? A multiple of average earnings would be much fairer and not discriminate between the type of business that people run.
Liam @ 68 – do you mean just the increase in value of existing shares? Getting paid in shares would still be treated as income by the tax office (as it should be).
Chris, I mean that for doctors trading as their own practice, getting paid in shares is the same as income. Unless, of course, they’re voting themselves their own bonuses with performance indicators they’ve set for themselves, but it seems fanciful. Are there many incorporated and listed medical practices in which executive management are also practitioners?
Obviously I agree with you and with Robert’s point from the post proper, that taxation is a much better way to do this than salary capping. In the end my problem with the idea of salary capping is that it’s an economic solution to a moral problem (people being paid too much). A very small minority being paid to excess—especially if they’re doctors—doesn’t directly harm anyone in the same way a very large minority being paid too little does: accordingly I prefer a solution to income inequality that starts at the bottom end.
Chris, fair enough. In that case it certainly shouldn’t include apprenticeship/trainee wages as part of the multiplier. Regarding young adults, I’ll stand by the point @69. If it’s already profitable to hire young adults, the company will continue to hire young adults.
My problem with the median wage idea (without giving it much thought or back-of-envelope time yet) is that it would seem to bring about a Borges’ hydra-type/Achilles limit-approaching paradox, whereby the salaries of the CEO, other top execs, high and mid-high level management are all contributing to the median. Their salaries, not those at the bottom, might all begin to bulk out, so as increase that median, which doesn’t seem right. I’m happy to be disproved on that.
Though Robert, just to clarify – do you mean based on the median Australian wage, or median company wage?
Nick @ 73 – If its the median (ie middle) rather than the average then the high salaries of CEOs, sportstars, movie stars etc, won’t really cause any distortion.
The median will remain the same whether the highest paid worker in the land gets paid $1m or $100m/year
Ah hah, true!
How does a medical specialist earning a ~$mil get “paid” in shares in a company s/he already owns?
Good point Carbonsink. The same would apply for many a non-public company. Perhaps I am missing a mental enzyme or something, but I am not able to grasp the rationale for attempting to control the remuneration of executives in companies which are not publicly listed.
SATP, I don’t think non-publicly listed companies are the issue. There was a paragraph I liked in the Regnan proposal:
The comments of Chris and Craig Mc demonstrate their total ignorance of how SMSFs run and lack of understanding about the working conditions of the casualised workforce. The casual workforce can be divided into students who live at home and quite happy to do a shift or 2 a week to pay for their entertainment. A high proportion of casual workers work multiple jobs in order to garner a living wage. The worker will be running a seperate super fund for each employer. I have seen casual employees have 5 employers simultaneously and 8 employers for the year although I think 3 employers for the year would be the norm.
From observation many graduate workers start a permanent full time job at age 28 and get pushed out after age 50. Many casual employees are too inemperienced to get a full time job or over 50 therefore a threat the super funds of the younger workers.
billie, that’s the first time you’ve even mentioned casual workers (as opposed to low-paid workers), so I don’t know if you expect Chris and CraigMC to be mind readers. Not to mention, Chris wasn’t disagreeing with you, and Craig MC was offering advice.
Unscrupulous employers trying to coerce potential employees to sign up to their company super scheme is still a big problem. Yes, that probably happens more in casualised workplaces eg. call centres etc. Yes, it’s probably difficult to do much about, or to prove it occurred. At the very least, you can lodge a complaint about the employer, hope that others are doing the same, and maybe something will come of it.
But what’s your point beyond all that? What does it have to do with SMSFs?
Or, why is the problem any different for the 5% of ‘low-paid’ workers who have SMSFs, compared to the 95% of ‘low-paid’ workers who don’t?
“Many casual employees are too inemperienced to get a full time job or over 50 therefore a threat the super funds of the younger workers.”
Pardon? Can you explain what you mean by this?
Often graduates start in part time jobs to get enough experience to get a full time job in the profession for which they trained. In some years no graduates are hired so all graduates start in part time work, in other years only graduates from less well respected universities start in part time work.
When you review the backgrounds of employees who are retrenched, you find older employees with a long history with the company who have a large super entitement who are still in lower positions are more likely to be retrenched.
Because the employer provides superannuation funds there is a prejudice against employing older workers. Bunnings is a notable because it is an exception.
Schools still pushes older teachers out the door to make way for younger teachers who are closer to the students in age, so do universities – even if the subject is unchanged.
Look around your local Op Shop – you might discover that the volunteers are about 60 and working in the Op Shop for 2 days a week as part of their ‘mutual obligation’ to receive NewStart Allowance
We fail to remember that the average age of Australians is 37, 50 yeras ago the average age was 14, and children could start full time work at age 14.
“Because the employer provides superannuation funds there is a prejudice against employing older workers. Bunnings is a notable because it is an exception.”
Why is there a prejudice? I don’t understand.
They have their choice of funds – by law (with few exceptions). Running a separate fund for each employer is idiotic. It may default to that if the employee doesn’t state a preference (and many won’t), but it’s not limited to that. It’s the employee’s responsibility to manage their preference.
What that has to do with SMSFs I don’t know. They’re two separate issues.
Jenny [59]:
Of course. Didn’t think of that. It would damage productive and nice-looking fruit trees. I’m sorry. It’s just that using a power-pole would waste too much rope.
Liam [58]:
I have long expected the financial house-of-cards to collapse and felt, too, that sooner-or-later there would be a fierce reaction to merciless plundering of customers and shareholders alike by talentless dullards called “CEOs”. [Wonder what would happen CEO positions were raffled off among the temps working in the 3rd and 4th floor offices - would we really be any worse off?]
What did surprise me was the utter loathing for such CEOs there was among normally mild-mannered grannies. If a referendum was held right now for the reintroduction of the death penalty, it would romp in – not to rid ourselves of murderers and rapists [the favourites target of the noose-and-lash brigade] but to rid ourselves on those who have plundered the life savings of many
When you’ve got the grannies offside, Graham, that’s when mobs start getting dangerous. As has been discussed in the thread, capping executive pay is about guarding the public morality, a very valuable thing. Over to you, Max:
SATP [79]:
Nothing at all wrong with anyone getting rich through being clever or working hard or being highly skilled or just being plain lucky – whether in a publicly-listed firm, a family enterprise, a church, a club or whatever. Good luck to them.
But …. when some get rich solely through plundering all-and-sundry, through being an out-and-out fakes and frauds, through causing death and misery to many …. then Society has a compelling need to protect itself.
Craig clearly you are not a powerless casual employee!
Do you run your own superfund? If you are a public servant, you must contribute to the employer’s super fund. Many employers run their own super funds and they make it difficult to opt out of their fund. Even a casual acquaintance with the pay office processes will tell you that many firms struggle to pay their employers super contributions to one fund quarterly and in fact the ATO has shut down prominent sinners like National Mills for bot paying the super contributions etc. So is a pay master/mistress going to collect the 9% to pay to the fund of your choice. In my experience – it’s not on your nelly!
When you ask ‘why would casual employees run their own superfund?’, well because they may have had a real job which they lost about age 50 and have to work at whatever they can get, casual employment, until they can access their super.
I am sorry that Nick doesn’t understand that chronic unemployment and underemployment of older workers is partly due to prejudice against older workers that I believe has some roots in employer based superannuation. Check the ABS Employment Series to see that unemployment and underemployment are prevalent amongst workers over 50.
billie @ 87 – public servant super schemes (not sure about all governments around australia) are much better than anything else you’ll find. Large co-contributions, guarantees that the value *never* drops, etc. Those on onlder super schemes are basically pension plans (eg 75% of your salary for the rest of your life regardless of the performance of money invested). I’d happily trade my super scheme in for a public service one
I think Nick was questioning why you claim that superannuation causes employers to discriminate against older workers.
Billie @ 87: Depends upon the jurisdiction one is in, but in mine, it is law that the employer must pay the superannuation rort (sorry, contribution) into the superannuation fund nominated by the employee. Also the employer must present the employee with a choice of superannuation funds.
“I think Nick was questioning why you claim that superannuation causes employers to discriminate against older workers.”
Yes, thanks Chris. Sorry billie if I didn’t make my question clear enough.
There are exceptions to universal super, and state public servants are one of them. OTOH, aren’t they defined benefits schemes? More generous than the standard 9% the rest of us get? Why would you want to contribute anywhere else?
They will if they’re threatened with being shut down by the ATO – just like they shut down National Mills. If that doesn’t frighten them then you’ve got bigger problems than super.
I can understand if an employer doesn’t want to deal with the complications of managing each employee’s fund choice and writing cheques to dozens of different funds each quarter, but that’s tough. It’s an obligation, not a choice.
What you’re complaining about is enforcement, not entitlements. If you’ve got a case, call the ATO and give them the evidence. It worked for someone at National Mills.
As I stated earlier the Superannuation Ombudsman never answers the telephone. The ATO refers enquiries to the Superannuation Ombudsman’s phone numebr – no address given.
Men in well paid jobs are routinely given choice of super fund. I know one agency that asks the engineers it places where they want their super paid, but the teachers are told who their super fund will be.
They’re probably under a state award. Depending on their scheme they’ll want to stay that way. Blame the state government (and perhaps the union) for that situation.
Craig Mc, the various public services used to provide defined benefit schemes, but I think that is no longer the case. Most of the people who still had an entitlement to the old schemes have already retired.
A lot of this talk about pollies capping remuneration is just populist hansonite bullshit.
Ms Pac Dun got blasted in the press and by pollies because she gets $1.5 bigones per annum while having to put off low paid workers because australian patriots won’t pay $25 for undies handknitted at Nunawading by other patriots.
Today Premier Brumby just put his hand in the Vic taxpayers pocket to pay $3 bigones to an overseas sports star to induce him to hit a ball around a park for a few days.
I know who I think might have earned their dough.
FXH, I’d cheerfully buy such undies if they were actually available any more. It seems we no longer make things in Australia.
While Ms Pac Dun (arguably) adds more value than Tiger Woods, her physical skills are not as astonishing.
Billie, a search provides the following:
But as I said earlier and as CraigMc has said as well, it’s the ATO who do enforcement of superannuation rules on the employer contributions side of things, not the SCT.
Francis Xavier Holden @ 95
Probably getting a bit off topic … but I’ve never let that stop me.
I guess it’s just possible that the three mill is justified by TV rights, tourism and other real cash-flow benefits. But, I’ve seen a few business cases for stunts such as this and I’m suspicious. Invariably, they’re justified with the assistance of claims about the ‘multiplier’ affect. For example, Woods coming here will increase employment in catering, golf shops, tourist businesses, etc etc, which in turn will lead to cashed-up employees throwing money around and further stimulation to business, which in turn leads to blah, blah, blah and on and on. The argument doesn’t look quite so good when you realise it applies equally to throwing three million dollars out of a helicopter.
The problem is that, the multiplier affect should only be included in your cost benefit analysis to the extent that it provides greater downstream benefits than alternative uses of the money, including the option of not taking it from taxpayers in the first place.
Which, I guess is what people like Malcolm Turnbull are saying about the stimulus package.
Those “economic benefit studies” are almost always complete crocks.
They never take into account opportunity cost, or do so in an incredibly simplistic way.