Public outrage over multi-million dollar CEO salaries will never go away when employees are underpaid. It offends our sense of fairness and the increasingly threadbare notion of Australia as an egalitarian nation.

This point is not lost on many who read about Woolworths’ admission it underpaid nearly 6,000 staff over ten years by a total $300 million.

The supermarket chain had failed to account for the actual hours that staff were working, with out-of-business-hours work patterns attracting penalty rates, which were not being added to their salaries.

Other companies which have been caught out with similar underpayments include Qantas, ABC, Commonwealth Bank, Bunnings, Super Retail Group and Michael Hill Jewellers.

While some business leaders laid blame on the complexity of modern awards, Fair Work Ombudsman, Sandra Parker said employers were at fault with “ineffective governance combined with complacency and carelessness toward employee entitlements”.

Human resources leader, Alec Bashinsky, was succinct in his response: “This is 101 stuff and not acceptable in any scenario”. For 14 years, Bashinsky was Asia Pacific talent leader for Deloitte, which employed more than 3,000 people in Australia alone.

Revelations such as the underpayments just add more fuel to the conflagration of distrust and anger, which has led to the rise of anti-establishment political movements around the world.

In Australia, it builds on a mountain of evidence of businesses behaving badly, following revelations of the deliberate underpayments and worker exploitation in the franchising sector and the litany of unethical decision-making unearthed in the recent Royal Commission into financial services.

CEO’s get richer, worker pay stagnates

While company reputations have been trashed over the past couple of years, business leaders have continued to prosper. Company boards responded to public resentment over CEO salaries by reducing the pay of incoming CEO’s… while handing out the second-biggest bonuses of the past 18 years.

Thanks to those bonuses, the median realised pay for an ASX100 CEO reached $4.5m in the last financial year, according to a report by the Australian Council of Superannuation Investors.

Leaders whose companies were directly involved in recent scandals have been punished. Big bank CEO’s saw their remuneration fall over the past year. However, total remuneration for top 50 CEO’s increased by 4 per cent on average, compared to general wage growth at 2.2 per cent, according to the Australian Financial Review.

Macquarie Bank’s Shemara Wikramanayake was the highest paid with $18 million, followed by Goodman Group’s Gregory Goodman with $12.8 million.

Labor MP and economist, Andrew Leigh says the growing gap between the leaders and the led poses a threat to the Australian ethic of egalitarianism.

“Australia is a country where we don’t have private areas on the beaches, we like to say ‘mate’ rather than ‘sir’, we sit in the front seat of taxis and we don’t stand up when the prime minister enters the room,” says Leigh, who is also Deputy Chairman of the Parliamentary Economics Committee.

Former chairman of the Australian Competition and Consumer Commission, Allan Fels, has written: “The increase in pay levels for CEO’s has occurred at a time when public trust in business is at a low ebb and wages growth in the broader economy can best be described as anaemic”.

The rising levels of income inequality create serious social harm, according to the Australian Council of Social Service (ACOSS).

Someone in the highest one per cent now earns more in a fortnight than someone in the lowest 5 per cent earns in an entire year.

“Excessive inequality in any society is harmful. When people with low incomes and wealth are left behind, they struggle to reach a socially acceptable living standard and to participate in society. This causes divisions in our society,” according to ACOSS, after the release of its Inequality in Australia report in July.

“Too much inequality is also bad for the economy. When resources and power are concentrated in fewer hands, or people are too impoverished to participate effectively in the paid workforce, or acquire the skills to do so, economic growth is diminished.”

Reining in the excesses

Investors have a mechanism to act if they believe boards have been overly-generous in executive remuneration. In 2018, 12 companies in the ASX200 had shareholders vote down board remuneration reports in a “first strike” action. A further seven were close to experiencing a first strike.

According to the “two-strike rule”, if subsequent remuneration reports are voted down by at least 25 per cent of shareholders, the board positions may be subject to a spill motion. At this point, no company has experienced a board spill as a result of this rule.

The two-strike rule came into effect in 2011 after a Productivity Commission Inquiry into Executive Remuneration found that executive pay went up over 250 per cent from 1993 to 2007.

Labor went into the last Federal election with a policy aimed at encouraging more moderation in executive pay, requiring companies to publish the ratio of the CEO remuneration to the median workers’ pay.

At present, ASX-listed companies have to publish their policies for determining the nature and amount of remuneration paid to key management personnel. However, without a requirement to divulge what the median worker is paid, a ratio cannot be calculated.

The United Kingdom and the United States have both introduced new regulation to require their biggest listed companies to divulge and justify the difference between executive salaries and average annual pay for their employees.

This is going to put more pressure on CEO salaries as the public gets a clear picture. Research in the US shows, for instance, that the average person thinks the pay ratio is 30:1 when the average is actually closer to 300:1.

Those disclosures can have material impacts on a business. The US city of Portland has imposed a 10 per cent tax surcharge on companies with top executives making more than 100 times what their median worker is paid and a 20 per cent surcharge if pay gaps exceed 250 to one.

Leigh says the top 50 CEO’s in Australia are now earning packages at a ratio of around 150 or 200 of median wages in their organisations.

“Those ratios are truly out of whack. If you go back to the 1950s, and 1960s, workers at Australia’s largest firms could earn in a decade what the CEO earned in a year.

“Now, it would take multiple careers for workers in many firms to earn what the CEO earns in a year.”

Setting a fair pay formula

When you have these two issues running concurrently – ever-rising CEO pay and underpayment of workers – it seems appropriate to take a new look at what fair pay looks like.

Some companies have tried to ensure fairness by setting CEO pay as a multiple of the salary of an organisation’s lowest-paid worker.

Mondragon is a Spanish co-op famous for its egalitarian principles. Its CEO is paid nine times more than what its lowest-paid worker earns. In comparison, the CEO of an average FTSE 100 company is paid 129 times what their lowest-paid worker earns.

Mondragon is not well-known in Australia, but is a vast global enterprise, employing more than 75,000 people in 35 countries and with sales of more than Euro12 billion per year – equivalent to Kellogg or Visa.

US ice cream company Ben & Jerry’s took inspiration from Mondragon, setting a five-to-one salary ratio when it started in 1985.

Writing in their book Ben Jerry’s Double Dip: How to Run a Values Led Business and Make Money Too, the founders Ben Cohen and Jerry Greenfield say: “The compressed salary ratio dealt with an issue that’s at the core of people’s concerns about business and their alienation from their jobs: the people at the bottom of the ladder, the people who do all the actual physical work, are paid very poorly compared to the people at the top of the ladder.

“When we started our business, we were the people at the bottom. That’s whom we identified with. So we were happy to put into place a system whereby anytime the people on the top of the organisation wanted to give themselves a raise, they’d have to give the people on the bottom a raise as well.”

Ben & Jerry’s kept that arrangement in place for 16 years but, when Cohen wanted to retire, attracting a replacement CEO meant raising the rate to a seven-to-one ratio.

“ … as the company grew, the salary ratio became problematic. Some people in upper-level management believed that we couldn’t afford to raise everyone’s salaries, and the salary ratio was, therefore, limiting the offers we could make to the top people we could recruit,” wrote the founders in 1998.

“Other people – Ben included – thought money wasn’t the problem, and that we’d always had problems with our recruitment process. Ben points out frequently that eliminating the salary ratio, which we did in 1995, has not eliminated our recruiting problems.”

The New Zealand Shareholders Association has also called (in 2014) for CEO base pay to be capped at no more than 20 times the average wage.

Fairness is important to us

Leigh, who wrote a book Battlers and Billionaires on inequality, says people naturally benchmark themselves against those around them: “That is how we figure out what we are worth”.

The point is that people care less about the dollar figure they are paid than they do about how it compares to others. If they think it is unfair, their attitude at work and motivation suffers.

“People work less hard when they feel they have not been adequately recognised within the firm,” says Leigh.

Pay transparency – making salaries public knowledge – can be a two-edged sword. People further down the “pecking order” feel worse when they see how others are paid more. However, people should be able to find out where they stand and what they need to do to climb the salary ladder.

“If you are running a firm where the pay structure is only sustainable because you are keeping it secret, then you are walking on eggshells. Ultimately, good managers should be able to be transparent with their staff. Secrecy shouldn’t be a way of doing business,” says Leigh.

“If you are playing football with David Beckham, you don’t begrudge the fact that David Beckham is pulling in a higher salary package than you. The problem arises when there are inequities that aren’t related to performance.

“People are comfortable with the fact that a full-time worker will earn more than a part-time worker, that someone who has another 20 years’ experience gets rewarded for that experience. But, if you are being paid more just because you are family friends with the CEO or you share the same race as the CEO or the same gender, then that is not fair.

“So pay transparency can produce fairer workplaces.”

This article was originally written for The Ethics Alliance. Find out more about this corporate membership program. Already a member? Log in to the membership portal for more content and tools here.