CEO salaries no longer private

23 August 2017

The Chief Executive of one of Australia's biggest accounting associations has been sacked by the board and given a A$4.9 million (NZ$5.3m) pay-out. CEO Alex Malley, faced extended lobbying to disclose his salary to the members of Certified Practising Accountants of Australia (CPA) for some time.

CPA Australia ultimately disclosed Malley's total remuneration to be A$1.8 million a year. The campaign for disclosure was harmful for CPA. In addition to Malley's sacking, the fallout led seven board members to resign within two weeks of each other.

The battle within CPA reflects a greater thirst for transparency about money going towards senior executives' salaries and other benefits.

In a membership organisation such as CPA, members may ask for this information as money going to management and not to training courses and membership education should be justified.

United States President Donald Trump is known for his blunt, often derogatory tweets. Certainly he is communicating directly to the public and with bluntness we are not used to from a political leader. One could argue that his communications, while unorthodox, are transparent.

The thirst for greater transparency goes beyond political campaigns to the business world. Public concern in Australasia over poor remuneration practices has led to a push for greater public disclosure of executive remuneration.

Poor remuneration practice is often a red flag for ineffective corporate governance. The unexpected collapse of telecommunications company OneTel and insurance company HIH Insurance were partly based on poor remuneration practices.

In 1993 the New Zealand Government reformed the Companies Act, adding a new requirement for companies to publish details of executive remuneration exceeding $100,000 in their annual reports.

Due to public concern that salaries should be kept private, the Privacy Commissioner wrote a report on the matter in 1997, finding that mandatory publication was too harmful to privacy and a better scheme should be devised.

The tide of public opinion is now turning the other way. In addition to the case of Malley, our own stock exchange has brought in a new corporate governance code which takes effect on October 1.

It requires companies listed on the stock exchange to disclose the remuneration arrangements in place for their chief executives in their annual reports. Reporting should include the base salary, all other incentives, and performance based payments.

It is true that some New Zealand companies already voluntarily report chief executive remuneration, including the leading banks in this country.

A membership organisation similar to CPA, Chartered Accountants Australia and New Zealand (CAANZ), has been disclosing the salary of its chief executive for the past two years, putting pressure of other accounting and governance bodies to do the same.

The CAANZ chief executive earned between $750,000 and $800,000 in the 2015 financial year, and $800,000 and $850,000 in 2016 financial year.

The argument generally is that executive remuneration is something that members of an organisation or shareholders in a company ought to know. Organisations should be transparent.

Many analysts also believe that disclosing salary information is good for business.

Business researchers from Cornell University and Tel Aviv University have conducted studies comparing the situation when workers were given all pay information including what others were earning, and other workers were not.

The people armed with information worked harder and significantly increased their performance after they received the information.

In addition to remuneration, disclosure is often expected when a senior executive's employment is terminated and they are given a large pay-out.

Government organisations and local authorities are normally expected to disclose termination payments given to senior executives, largely because the money in question comes from the ratepayer or taxpayer.

Often the Ombudsman is asked to rule on whether such information should be made public.

The drive for disclosure is focussed particularly on membership organisations, publicly listed companies, and organisations funded by the rate payer and tax payer.

Companies at the other end of the scale, small and medium enterprises such as those providing plumbing or electrical services or an incorporated corner store, are a long way from facing pressure or legal obligations to disclose the salary of their management.

This is a sensitive issue where the individual often feels their salary is private and their own business. However, in large organisations and public bodies there is a strong thirst for openness, particularly when people have contributed by way of membership fee, rates, or tax to what ends up in the pockets of senior executives.

The coming changes to companies' reporting are significant and will be a big change for large companies listed in New Zealand.