Because I am a Telstra shareholder, I recently received a letter from the Chairman of the Board, John Mullen. “Dear Shareholder,” he began, “I am writing in advance of Telstra’s Annual General Meeting (AGM) because as we have listened to shareholders over the last few weeks, we know that a number of you are disappointed with this year’s remuneration outcome.”

He then went on for the best part of four pages justifying the salaries and bonuses paid to senior Telstra executives.

He pointed out that the board had reduced executive bonuses (not salaries) by 30% this year. Telstra’s share price is down by about 40% over the last year (more if you take a longer timeframe), and dividends have been cut by about 30%, too, so not surprisingly the chairman has to acknowledge that “despite this action by the board, some shareholders still feel that our remuneration outcomes were either not sufficiently transparent or resulted in higher payouts than shareholders felt were reasonable.”

‘Transparency’ would have been enhanced by including an exact statement, in dollars, of what executives earned in 2017 and 2018 and what they could expect to earn in 2019 (a range from least to most would have been required for this, because the remuneration structure is designed to keep exact figures obscure. The Chairman’s four-page letter is full of bureaucratic language about an “Executive Variable Remuneration Plan (EVP)” and “Relative Total Shareholder Return (RTSR) performance hurdles”. You can read the letter if you click on this link. The most annoying thing about all the verbiage is that while you can bend your brain enough to understand how it works, at the end you are none the wiser about what actual amounts will be paid to who when.

Fortunately, there is a statutory requirement for some of the actual figures to be published in the annual report, so let’s have them here:

	2017	2018
Andrew Penn, Chief Executive Officer	$5,660,000	$4,518.000
Vicki Brady, Group Executive Consumer & Small Business	–	$1,640,000
Warwick Bray, Chief Financial Officer	$2,548,000	$2,181,000
Robyn Denholm, Chief Operations Officer	$890,000	$2,002,000
Will Irving, Group Executive Wholesale	$2,055,000	$1,991,000
Brendon Riley, Group Executive Enterprise	$3,233,000	$2,614,000
Kevin Russell, Former Group Exec Consumer & Small Business	$2,009,000	$314,000
Total current and former key management personnel	$16,395,000	$15,260,000

Andrew Penn’s total remuneration is down about 20%, but the lucky man still has his job — unlike the thousands of one-time Telstra employees who have been made redundant over the last decade. You can see this ABC article to get a quick overview of that decline.

For the hoi-polloi who still have a job with Telstra, “The average Telstra salary ranges from approximately $42,267 per year for Customer Consultant to $132,772 per year for Senior Account Executive”, according to the Indeed job site. This means that Andrew Penn is currently paid more than 100 times as much as his least-well-paid full-time Australian employees (heaven help the call centre workers overseas!) and more than 33 times as much as his senior account executives.

This is too much money. The chairman’s letter that tries to bamboozle me into thinking otherwise is a waste of time. When it comes to the Telstra Annual General Meeting, I will vote my shares against accepting the remuneration report. I am not really picking on Telstra here: I would have to do the same if I was a shareholder in any other of our big corporations, because grossly overpaying our corporate executives is now standard practice. Finance industry companies have even more egregious discrepancies between executive pay and reasonable expectations.

Now let’s make ‘transparent’ my real thoughts on executive renumeration:

1. The best executives are not acquired by paying exorbitant salaries. Some studies have found no correlation between executive pay and corporate performance.[1] The number of suitably qualified people who would do a great job as Telstra executives is actually quite high, and competition to be given a chance in the top jobs is fierce. If the remuneration were half what it is now, the kind of people who would apply for the work might change slightly, but this might well be a change for the better.
2. Once you pay someone more than (say) $400,000 a year, you should be able to expect their best work all the time. If they are not socially well-adjusted enough to work hard and honestly for that sort of money, they are not suitable for employment at all. So all the fandango about ‘short term incentives’ and ‘long term incentives’ and ‘performance related payment schemes’ is rather beside the point.
3. The real reasons for paying executives grossly inflated salaries are largely to do with maintaining the interests of the executive class: a round-robin of overpaid consultants, accountants, board members, and executives tacitly agree to overestimate the value of their colleagues, thereby reinforcing the likelihood that they themselves will remain on the gravy train.
4. The effect of inflated corporate salaries on everyone else is deleterious. Social equity is damaged. In general, when people look up and see that some executives are paid twenty, forty, or a hundred times what they earn in their jobs, it aggravates their suspicion that there is no justice in the universe. It inclines them to think that the name of the game is to grab what you can for yourself, and damn everybody else. The effect this has workplace morale and morality is utterly destructive. A good corporation is not composed of people who think that way. A good corporation produces good products and services for a fair price and does it without hurting anybody. A good corporation is a huge team effort, where everybody is doing their best for the team, and the team is doing its best for the society it works within. Achieving that kind of teamwork demands a close relationship between executives and staff. Too big a salary gap between the top and the bottom and you destroy any prospect of that kind of cooperation and goodwill.
5. Aligning the behaviour of the executives to the needs of the organisation can be a problem, but exorbitant pay is not the solution, because of the appalling effect this has on corporate culture (see point 4). Funnily enough, the solution is to do with ‘transparency’ and ‘accountability’, and the methods that are used to oversee the ethical behaviour of executives. The Chairman of Telstra was paid $781,000 in 2018 to do this — but I guess we can’t blame him if he finds it difficult. After all, it’s not his full-time job.

— Craig Bingham 2018

[1] See, for instance, https://www.theguardian.com/business/2016/dec/27/negligible-link-between-executive-pay-and-firms-performance-says-study  ; or https://cooleypubco.com/2016/07/25/new-study-shows-inverse-correlation-between-ceo-pay-and-performance-over-the-long-term  . A recent masters thesis that surveys the literature says this: “Many scholars have explored and scrutinised the relationship between [executive] compensation and performance but the results are inconsistent. Some indicated a positive relationship between compensation and performance (Kuo, Li, & Yu, 2013; Hanlon, Rajgopal, & Shevlin, 2003) while others found a negative relationship (Balafas & Florackis, 2014; Cooper, Gulen, & Rau, 2014). These findings suggest that in general there is no consensus regarding the direction of a real relationship between compensation and firm performance.” https://lib.ugent.be/fulltxt/RUG01/002/351/059/RUG01-002351059_2017_0001_AC.pdf

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