KMP Report No. 4 : Executive Remuneration and the Current Debate on Productivity

Where Does Executive Remuneration Sit in the Current Debate on Productivity?

The issue of productivity is being debated extensively in the community at the moment. Often when the topic is raised, the discussion includes a debate about the productivity or otherwise of the employee population. Less commonly does the discussion include a significant analysis of how the executive population is contributing, or not, to improvements in productivity.

Given this debate about productivity, Egan Associates is undertaking research into the very issue of executive productivity as part of its efforts to make a meaningful contribution to the discussion.  We are posing the question of how productive are Key Management Personnel in our next KMP Report. This article alerts you to some of the issues which are part of the current debate and the issues which will be subject to that research.  We invite you to make any comments to this debate as we continue to review it through the lens of our experience and expertise in executive remuneration.

It is worth highlighting the breadth of the debate as we start this journey.

The Business Council of Australia

The current debate has been reignited by the Business Council of Australia’s (BCA) recent submission that the Fair Work Act is not supporting Australian businesses to stay competitive in a challenging economic environment. It argues that workplace relations play a key role in enabling business to quickly respond to economic challenges and that changes need to be made to the current IR system.

The BCA also highlighted that a bigger proportion of working-age Australians are in work now than 20 years ago and the growth of part time jobs, now accounting for 30 per cent of all employment, is part of the flexibility that was a key factor in protecting jobs during the global financial crisis, when, without the ability to reduce working hours, many would have had to sack employees. It stated that employers want the flexibility to ensure they have the right people working at the right times so they are productive, innovative and flexible, and can stay competitive.

Following the BCA’s submission, the Australian Financial Review conducted a round-table discussion, with members of the Business Council of Australia who said Australia was now a higher-cost country than the United States, but not as ­productive. The discussion focussed not only on industrial relations and productivity but also on the government’s failure to cut red tape, the need to continue to fight against protectionism and the importance of skills, education and migration.

Westpac Banking Corporation’s chief executive Gail Kelly, Transfield’s chairman Tony Shepherd and Stockland managing director Matthew Quinn sent a message to both sides of politics to lift their focus on policies to boost productivity and provide consistency and predictability to business. “We’re becoming a high- cost, low-productivity nation. And that certainly is something we can’t sustain,” Mr Shepherd said.

Saul Eslake in his role at the Grattan Institute

In an article titled “What is to be done about Australia’s deteriorating productivity performance?” Saul Eslake took the view that maybe it is not the role of government to do anything about productivity. He pondered the thought that while ever the mining boom delivered continued growth in income and higher levels of employment, maybe there wasn’t anything to be done by government.

He presented the idea that many of the difficulties now being encountered by sectors of the economy adversely affected by some of the side-effects of the mining boom, (in particular the rising exchange rate) will prompt those businesses to prioritise productivity as a matter of survival, without any need for public policy changes.

In arguing what might be necessary for improved productivity, he took the view that productivity improvements occur as the result of decisions taken by and implemented in enterprises and workplaces, not as the direct result of public policy initiatives.

John Buchanan, Professor and Director of Workplace Research Centre – “Where did the productivity growth of the last 30 years go?”

John Buchanan presented a different and personal perspective, stating at the outset that “output per worker has all but doubled since 1978. Real wages have only risen, on average, by 20%.”

He challenged the debate by asking the question: “Where did the productivity growth of the last 30 years go?

Any starting point for a serious analysis of how to improve output and employment must grapple with the non-delivery of promises made over 30 years about how a society can prosper by embracing market-inspired structural reforms.

Work I am currently undertaking with scholars in the US and UK reveals that many of the ‘gains’ of the last 30 years were achieved by factors other than market flexibility. Indeed, net employment growth outside publicly funded community services and health has been anaemic – even in the heartland of the ‘new economy’, California.

And the growth that has occurred has generated more jobs of poor quality, in terms of labour standards, than in the past. This experience highlights that the GFC was not an accident. Rather, it was the culmination of an unsustainable policy regime.

Policy makers need to give greater attention to job quality and fairer distributions of income – both functional and personal – if we are to move onto a sustainable trajectory of economic development.”

Universities Australia – the role of higher education in improving productivity could be greater than all the reforms currently being considered in the debate

According to Universities Australia Chief Executive Dr Glenn Withers: “Full implementation of the landmark Bradley Review of Higher Education can do more for GDP and living standards growth than any other single publicly identified and costed reform”.

“Modelling for Universities Australia estimates that this Bradley reform scenario would add some 5.6% to national productivity by 2040 and some 6.4% to Australia’s GDP”.

“Other reform proposals ranging from tax reform and workplace reform through superannuation changes and free trade agreements to broadband and schools and health reform are valuable but each add less”.

“It is time to build our national capability to compete and to work smarter through investing in the Australian people. Knowledge investment and infrastructure renewal can be the core of a new reform era for the twenty-first century”.

Chris Styles, Deputy Dean and Director, Australian Graduate School of Management – “What is the role of managers in encouraging productivity improvement?”

According to Chris Styles, “Workplace Relations Minister Bill Shorten’s call for managers to do more to improve employee engagement shines the light on the productivity debate on the quality of management and leadership in Australia.

….there is no doubt that Australia’s productivity is not at the level it should be, particularly when compared with other Organisation for Economic Co-operation and Development countries. The 2009 report Management Matters – How productive are we? – completed for the Department of Innovation, Industry, Science and Research – concluded that one of the causes of our lagging productivity was that while some of our organisations stacked up well with the best internationally, there were too many that did not perform well at all, particularly when it comes to managing people.

Getting people, processes and systems to work productively is a challenge and the responsibility of everyone in an organisation, but in particular those in managerial positions. Creating, encouraging and reinforcing the right environment within an organisation drives innovation and, in turn, its productivity. More productive organisations obviously result in a more competitive Australia. However, getting people, processes and systems to work productively is a lot harder than it sounds.

We not only need to draw on what research tells us works, but also instil a mindset of constantly finding new and better ways. In the same way we emphasise innovation with respect to products and services, we also need a focus on innovation in business models and management practices.

We also need to think through what forms of organisation are needed now and may emerge in the future to meet customer demands.

….. taking into consideration the changing needs and aspirations of the workforce, we need to create and develop the most productive models of management. There isn’t, and won’t be, just one right answer.

This leads on to the kind of skills, attributes and knowledge needed by managers. Acquiring and developing these will be the result of experience, experimentation, coaching and structured learning experiences. Getting this right will require dialogue between organisations, business schools, unions and government as to how to equip managers with the mindset and tools they need. If ever there was a time for collaboration, it is now.”

Australian Institute of Company Directors

In the March 2012 edition of AICD’s Company Director Magazine, Phil Ruthven raised the issue of productivity as a multi faceted one which requires a broader consideration.  He argued that four factors should be taken into account in trying to determine what can be done to improve productivity and in trying to explain our current lull in the growth of productivity, namely:

  1. Recalcitrant industries – only 20% of industries in Australia have kept up with average productivity growth in the last few years. These industries such as media and communications, finance and agriculture have had the advantage of technology, logistics and innovation to help create this improved performance.  The worst performing industry has in fact been mining.
  2. Delayed investment benefits – Ruthven takes the view that perhaps 25% of productivity growth shortfall is because of delayed investment benefits.
  3. Debilitating factors – Australia has certainly had its share of floods, fire and drought over the last few years, but the surge in manufacturing in China has probably had a more dramatic impact as has the overpriced Australian dollar according to Ruthven
  4. The Current IR system – as Ruthven puts it – while Fair Work Australia needs panel-beating – and a total re-think for the long term to be in tune with our new age… analysis suggests the main problem lies elsewhere.  Productivity has never been about working harder or longer hours, but working smarter with the aid of new technologies and new systems.Ruthven goes on to say that it is not to say that the legislation if left largely as it is will not have a long term depressing effect on productivity because it is fatally flawed in terms of matching where work, working patters and employees are headed… the term “employee” will probably go out of use in the second half of the 21st century as workers effectively become their own business on a contractual basis.
Egan Associate’s Current Research

Egan Associates is examining the relationships between executive remuneration and productivity, and the basis on which executives are rewarded, using both financial and non financial measures, is part of that consideration.  We are also examining the correlation between growth in executive remuneration levels and productivity improvements.  The findings of this research will be presented in a future KMP Report.  We will draw on our research base of the pay arrangements for both large and smaller employers in the ASX Top 300 companies.  Our hypothesis is that executive pay has outstripped productivity growth and in fact little correlation is expected to be found between increases in executive pay and productivity.

Egan Associates look forward to presenting this research as we endeavour to address the issue of maximising productivity improvements for the benefit of the broader economy.

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