The idea of incentivizing CEOs and senior executives seems reasonable to most people. Yet the large executive bonus is a relatively recent phenomenon. Executive pay grew more slowly than the average worker’s income during the 50s, 60s and part of the 70s. It was in the 1980s that the ratio of CEO to average-worker pay grew dramatically. It “exploded” in the 1990s. The astronomical rates of CEO fixed pay and bonuses that we are so familiar with today are only about 20 years old.
Australia’s Experiment in Restraining Executive Bonuses
So far, it seems to be working.
July 24, 2017
Dave Wheeler for HBR
Summary.
Some researchers have argued that big CEO bonuses — a relatively recent phenomenon — are a failed experiment. They don’t provide executives with the right incentives, and at the organizational level, they can decrease morale and fuel cynicism, especially if CEO pay climbs while average wages stall or grow more slowly, as they have in countries like the U.S., UK, and Australia. Is it now time to redesign the experiment? If so, how? One approach can be seen playing out in Australia. On July 1, 2011, the Australian Government amended the Corporations Act introducing the “two-strikes” rule. It works like this: If 25% or more of shareholders vote “no” in approving a company’s remuneration report at two consecutive annual general meetings, then the second meeting will determine if all directors need to stand for re-election. If this occurs then all directors (except the managing director) must stand for re-election within 90 days. This has given shareholders muscle and has changed the corporate environment around CEO bonuses. Further, it has provided boards with a rationale to act and the courage to do so. So far, it seems to be working.