Theres+no+economic+logic+behind+remuneration,+Crotty,+BRep



=There's no economic logic behind remuneration=

Business Report, Johannesburg, June 22, 2005

 * By Ann Crotty**

It seems that the market for top retail executives clears at a package of about R100 million. And if you were in the market for a top executive for one of the big banks you'd have to be offering a package of about R60 million.

Maybe what you could do if you wanted an executive for a big group of shops or banks is recruit several top executives from the media sector, where they are currently on special offer at a fraction of the price, then reskill them so that they'd be able to deal with irate customers rather than irate newspaper readers.

You could buy enough of them so that if a few didn't make the grade in their new executive environment they could be left by the wayside and you'd still be ahead by tens of millions of rands.

That's of course assuming that you haven't got one of those media executives with a Koos Bekker-type remuneration package that runs to the hundreds of millions of rands.

As you can probably see, try as I may, I cannot work out the economic logic behind the dramatic surge in executive remuneration over the past five years.

Should we assume that previous generations of top executives were grossly underpaid? Or that suddenly the job of top executive has become hugely more demanding? Or that in recent years the supply of people who could fill these jobs has all but dried up?

According to those in the know, you can express as much indignation as you like about the multimillion-rand packages, but they are here to stay and in fact will inevitably increase in line with "market forces".

Because we are told these packages are the result of vigorous investigations of the market for top executives and these are the sort of remuneration levels at which the supply of executives matches the demand.

But does this mean that if the Shoprite board was to offer someone an option package worth an extra R27 million, or 20 percent more than Whitey Basson's option package, which has a current value of roughly R135 million, that Shoprite would be assured of getting 20 percent more value from its top executive?

And how would the board measure that value? Additional earnings growth this year? Next year? Six years hence? A stronger share price this year? Next year?

If Basson was given 20 percent less, would he cut back his efforts by 20 percent? And would Shoprite's earnings and share price drop by the same amount?

It is very possible that in a number of instances - perhaps Pick 'n Pay's Sean Summers or Edcon's Steve Ross - the share price would take a considerable knock if the top executive departed, as would the profit performance, at least initially.

This possibility should raise concerns about the need to make succession planning more public. Mind you, highlighting the existence of replacements would take from the aura of unique ability that is often used to justify the payment of these huge packages.

In my lack of understanding of this gravity-defying remuneration situation I take some comfort from comments made a few years ago by William McDonough, the former president of the New York Federal Reserve Bank.

"I can find nothing in economic theory that justifies this development. I am old enough to have known the chief executives of 20 years ago and those of today. I can assure you that we chief executives of today are not 10 times better than those of 20 years ago."

I'd suggest that for half of what he is getting, Summers, who is an extremely talented, driven and committed executive, would pitch up for work at Pick 'n Pay. As would most of the other top corporate executives.

It may not be greed that drives top executives to horde such huge packages so much as the principles of comparative economics, better known to us as the economics of envy.

Thus Summers' remuneration committee and the attendant remuneration consultants believe that he should be getting at least as much as Basson, who in turn should be getting at least 10 percent more than ... and around and around it goes.

Perhaps the most important consideration is that, by virtue of the fact that they effectively control the remuneration-granting process, these guys get large packages ... because they can.

This is what makes them different from the rest of us. The rest of us may also be greedy but we are largely ineffectual.

For instance, there would be little point in my retaining the local remuneration consultants, "Options R Us", to come up with a detailed justification for a million rand package for me.

It wouldn't get beyond my editor. She would laugh and remind me of the vow of poverty we journalists take and not even bother to pass it on to someone who might pass it on to one of the lowliest of the members of the Independent Newspaper Group's remuneration committee.

By contrast, being effectual and being a chief executive means that you don't have to bother with these mundane hurdles. And you certainly don't have to worry about shareholders getting involved.

Given their short-term fixation, these shareholders are only too happy to rubber stamp any remuneration cheque and will certainly not bother to look for the underlying economic logic that might explain supply and demand in this particular market.


 * From: http://www.busrep.co.za/index.php?fSectionId=560&fArticleId=2573865