By Allen Myers
Industrial relations minister Peter Reith last week responded to the ACTU's launch of a campaign against excessive working hours by saying that most workers want to work overtime, because they want the extra money. Of course, if working overtime is the only way to increase your pay, then he's probably right.
But fortunately, there must be other ways — unless chief executives of Australia's largest corporations increased their overtime by 22%.
Twenty-two per cent was the average pay increase in the year to June 1999 for the CEOs of Australia's 100 largest companies, according to a survey by the Australian Financial Review.
The survey, reported in the paper's November 1 issue, found that the CEOs had an average salary package — base salary and benefits, plus bonuses and incentives — of $1.45 million. (That's a bit less than $28,000 a week for those of you who want to calculate how much overtime you'd need in order to match it.)
For nearly all the executives, bonuses/incentives were a significant part of their package; for about a tenth, bonuses/incentives exceeded the base salary.
For example, Alan Moss, head of the Macquarie Bank, has a base salary of just under half a million, but is getting an extra $3.1 million in incentives and bonuses. (The Financial Review didn't indicate whether the incentives were directly tied to the number of branches closed.)
The biggest bonus was raked in by Peter Chernin, the CEO of Rupert Murdoch's News Corp, who also topped the list for the biggest salary package. To a base salary of $4.85 million, Chernin added bonuses and incentives of almost $14 million, for a total of $18.78 million.
Frank Lowy, the founder and CEO of Westfield Holdings, had a base salary of $898,000 and bonuses of $6.7 million. Analysing the survey in the AFR, Trevor Sykes wondered why Lowy needed these incentives, considering that his family holds shares in Westfield to a value of $1.7 billion. It's a good question. Perhaps it's intended as an example to employees, to encourage them to work harder.
Are these figures too good to be true for the lucky few? On the contrary: they are not good enough to be true. As the AFR report went on to note, the CEOs are far wealthier than the salary package figures indicate.
For a start, most of the CEOs hold shares in the companies they direct, an average of $2.9 million per executive. (The figure excludes holdings of company founders like Lowy.) The Financial Review doesn't indicate what part of these holdings was purchased and what part was received as a form of salary.
More than twice as important as these shareholdings in the CEOs' wealth were company stock options. The 100 executives held options worth an average $6.15 million.
Stock options issued to executives allow them to purchase a set number of shares in the company at a price (called the "strike price") normally well below the market price.
For the company, this is a way of ensuring that the executive doesn't suddenly leave for greener pastures, because the options can't be exercised until the executive has held his/her post for some specified time.
As well, options theoretically reward an executive only if the company's stock price has risen because of good management, but in recent years, the shares of even the worst managed companies have been rising.
For the CEO, options are a desirable form of payment because they allow the option holder to minimise income tax.
If the strike price is equal to the market price when the options are issued, the executive is liable only for capital gains tax on any subsequent increase in the market price. The tax on the capital gain is not due until the stocks are sold, so executives can choose years when their marginal rate is lower to have this part of their salary taxed.
If the strike price is set below the initial market price, the difference is regarded as taxable income to the executive, but it is considered as deferred income, which is not taxable until the executive sells the shares.
One of the business tax "reforms" now being legislated by the Coalition government involves cutting capital gains tax in half. We should therefore expect to see a big increase in the already large part of executive income that is paid in the form of stock and stock options.
Predictably, the government will make up for the resulting decline in tax revenue by further cuts to welfare, health and education. It's all part of being able to compete for world's best practice executives.
In the meantime, would you like to work back tonight? Your boss could use the incentive.