Regulating Executive Remuneration in the Post- Financial ...
Regulating Executive Remuneration in the Post-
Financial Crisis Era: A Common Law Perspective
Jennifer G. Hill
Sydney Law School; Visiting Professor, Vanderbilt Law School
Draft paper only - Please do not cite without author's approval
Regulating Executive Remuneration in the Post-Financial Crisis Era:
A Common Law Perspective
Jennifer G. Hill*
Everyone, it seems, is currently interested in executive pay. Indeed, it has become the
zeitgeist of the global financial crisis, with a wide array of potential reform proposals
about executive remuneration now on the regulatory table in jurisdictions around the
Executive remuneration first came onto the corporate governance radar screen in the
1990s. During this period, a growing international interest in the improvement of
corporate governance standards and practices emerged, which paralleled a movement
from legislative regulation to self-regulation in the corporate sphere.1 There was also
* Professor of Corporate Law, University of Sydney; Visiting Professor, Vanderbilt Law
School; Research Associate, European Corporate Governance Institute. This paper is an
updated and revised version of a conference paper presented at the 2009 Annual Supreme
Court Corporate Law Conference, and published in Austin and Bilski (eds), Directors in
Troubled Times (Ross Parsons Centre of Commercial Corporate and Taxation Law, Univerity
of Sydney, 2009). I would like to thank Professors Randall Thomas and Ron Masulis, who
are my co-researchers on a broad comparative research project on US and Australian
remuneration contracts, and my Sydney Law School colleagues, Kym Sheehan and Joanna
Bird. Thanks also to participants at an International Executive Remuneration Workshop,
hosted by the University of Sydney and Vanderbilt University in Cambridge, England, in May
2009 and at a Vanderbilt Law School Symposium, Executive Compensation: Rewarding
Success or Promoting Excess in February 2010. I am grateful to Alice Grey and Sean
Wlodarczyk for their excellent research assistance. All errors are my own. Funding for this
research was provided by the University of Sydney and the Australian Research Council.
A number of reports and statements of best practice in relation to corporate governance and
director and executive remuneration emerged during this period. See, for example, OECD,
Principles of Corporate Governance (1999); Department of Trade and Industry, Directors'
Remuneration: A Consultative Document (July 1999); Committee on Corporate Governance:
Final Report (the Hampel Committee Report) (1998); Directors' Remuneration: Report of a
Study Group chaired by Sir Richard Greenbury (1995); Report of the ational Association of
Corporate Directors ( ACD) Blue Ribbon Commission on Director Compensation: Purposes,
Principles, and Best Practices (June 1995).
a radical paradigm shift concerning executive pay at this time. Executive pay, which
had previously been treated as a corporate governance problem, was re-interpreted as
an issue of misalignment between managerial and shareholder interests. This
transformation, which was strongly influenced by Jensen and Murphy's seminal
article in this area, "CEO Incentives It's Not How Much You Pay, But How",2
envisaged pay for performance as a self-executing mechanism, which could
effectively align the interests of management with shareholders. Executive
remuneration had, in effect, evolved from corporate governance problem to solution.
This theoretical redefinition had major consequences in the commercial realm, with
an increased focus on ex ante bonding devices, to align shareholder and management
interests through the design of optimal remuneration contracts.3 In this respect, the
transformation also served to legitimise executive pay, since, by adopting a "just
deserts" approach to remuneration, it offered the prospect of reward for superior
performance and financial penalties for inferior performance.4 However, some recent
economic studies have suggested that Jensen and Murphy's reinterpretation of
executive pay was perhaps less novel than it seemed, and that, in fact, US executives'
wealth had been sensitive to corporate performance for much of the 20th century.5
Since the heyday of performance-based pay in the 1990s, there have been two major
shocks to financial markets. The first involved the collapse of Enron, and analogous
See Jensen and Murphy, "CEO Incentives It's Not How Much You Pay, But How" (1990)
68 Harv. Bus Rev 138. See also Yablon, "Bonus Questions Executive Compensation in the
Era of Pay for Performance" (1999) 75 otre Dame L. Rev. 271.
For useful surveys on executive remuneration structures, see generally Guay, Core and
Larcker, "Executive Equity Compensation and Incentives: A Survey" (2003) 9 Econ. Pol.
Rev. 27; Bebchuk, Fried and Walker, "Managerial Power and Rent Extraction in the Design of
Executive Compensation" (2002) 69 U. Chi. L. Rev. 751; Murphy, "Executive
Compensation", in Ashenfelter and Card (eds), Handbook of Labor Economics (1999).
Jensen and Murphy, "CEO Incentives It's Not How Much You Pay, But How" (1990) 68
Harv. Bus Rev 138.
See Frydman and Saks, "Executive Compensation: A New View from a Long-Term
Perspective, 1936-2005" (June 2008, NBER Working Paper 14145), who state that
"compensation arrangements have served to tie the wealth of managers to firm performance
and perhaps to align managerial incentives with shareholders' interests for most of the 20th
century" (with the exception of the 1940s and 1970s) (id, 2, 33). According to the authors,
Jensen and Murphy's view in the early 1990s that CEOs were paid like bureaucrats may have
accurately reflected executive pay in the 1970s, but was otherwise "not generally true in the
past" (id, 2).
international corporate scandals around the turn of this decade; the second would be
the global financial crisis from 2007 onwards.
Puzzling differences emerge in the international regulatory responses to these two sets
of events. Professor John Coffee considered that executive remuneration was a
possible cause of the Enron collapse.6 Nonetheless, international regulatory responses
to the issue of executive remuneration were relatively minor in the post-Enron reform
period. Other aspects of corporate governance, such as board structure and the role of
auditors, received far greater attention.7 This contrasts sharply with the current
environment, in which remuneration has become a regulatory flashpoint.
Although there has been much research on the determinants of executive pay, there
has, until recently, been far less scholarship on policies to control executive
remuneration. However, such regulatory policies to control executive have become
increasingly important during the global financial crisis, when issues of managerial
conflict of interest8 and income inequality came to the forefront of regulatory debate.9
2. From Enron to the Global Financial Crisis: Some Regulatory
Responses to Executive Remuneration in the US, UK and
See generally Coffee, "What Caused Enron? A Capsule Social and Economic History of the
1990s" (2004) 89 Cornell L. Rev. 269. On the role of executive remuneration in Enron and
other corporate scandals, see also Miller, "Catastrophic Financial Failures: Enron and More"
(2004) 89 Cornell L. Rev. 423; Hill, "Regulatory Responses to Global Corporate Scandals"
(2005) 23 Wis. Int'l L.J. 367. See also Report prepared by the Permanent Subcommittee on
Investigations of the Committee on Governmental Affairs, United States Senate, The Role of
the Board of Directors in Enron's Collapse (2002), 54.
See, for example, Hill and Yablon, "Corporate Governance and Executive Remuneration:
Rediscovering Managerial Positional Conflict" (2002) 25 University of ew South Wales Law
See, for example, Dew-Becker, "How Much Sunlight Does it Take to Disinfect a Boardroom?
A Short History of Executive Compensation Regulation" (2009) 55 CESifo Economic Studies
Post-Enron legislation in the United States paid relatively little attention to executive
pay. Only two provisions of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act),
ss 304 and 402, addressed the issue directly.
The most prominent of these, s 304, is a clawback provision, permitting recovery of
bonuses, incentives-based or equity-based compensation received by the CEO or
CFO, if the corporation is required to restate earnings due to material noncompliance
with financial reporting requirements, as a result of misconduct.10 Recent legal
scholarship has stressed enforcement as a critical feature of dynamic financial market
regulation,11 and enforcement of s 304 has been problematical. There have been less
than a handful of successful clawback actions under s 304,12 although there have been
several thousand financial restatements since the introduction of the Sarbanes-Oxley
Act.13 The provision's effectiveness has been undermined by a range of factors.
These include the fact that courts have held that only the SEC has enforcement rights
under the provision,14 the limited range of targeted corporate participants (namely
CEOs and CFOs), and uncertainty as to whether the requirement of "misconduct"
must be attributable to the executive from whom recovery is sought.15
In July 2009, the Securities and Exchange Commission (SEC) filed its first suit
seeking to recover US$4 in incentive-based compensation and stock trading profits
See generally Simmons, "Taking the Blue Pill: the Imponderable Impact of Executive
Compensation Reform" (2009) 62 SMU L. Rev. 299, 347-349.
See, for example, Coffee, "Law and the Market: The Impact of Enforcement" (2007) 156 U
Penn L Rev 229; Jackson, "Variation in the Intensity of Financial Regulation: Preliminary
Evidence and Potential Implications" (2007) 24 Yale Journal on Regulation 253.
See Schwartz, "The Clawback Provision of Sarbanes-Oxley: An Underutilized Incentive to
Keep the Corporate House Clean" (2008) 64 Bus. Law. 1, 2, 13-15, noting that six years after
the introduction of the Sarbanes-Oxley Act, the SEC had only obtained clawbacks on two
occasions, against a former CEO of United Health Group Inc in 2007, and against the former
CFO of Sycamore Networks, Inc in 2008. Id, 13-15.
Id, 2, 13-15.
The courts have definitively rejected private clawback actions by shareholders or corporations
under s 304. See ibid; Gordon, "`Say on Pay': Cautionary Notes on the U.K. Experience and
the Case for Shareholder Opt-In" (2009) 46 Harv. J. on Legis. 323, 334, n 39.
Simmons, "Taking the Blue Pill: the Imponderable Impact of Executive Compensation
Reform" (2009) 62 SMU L. Rev. 299, 347; Schwartz, "The Clawback Provision of Sarbanes-
Oxley: An Underutilized Incentive to Keep the Corporate House Clean" (2008) 64 Bus. Law.
from a CEO, who was not personally accused of wrongdoing, in SEC v. Jenkins.16
The suit has been described as "emblematic" of the SEC's newly aggressive stance on
executive pay.17 In a motion to dismiss the case,18 the defendant, Mr Jenkins,
described the SEC's action as constituting an illegitimate and punitive "post-Madoff
interpretation of s 304".19 It has been argued that a strict vicarious liability
interpretation of s 304 may undermine the Sarbanes-Oxley Act's policy goal of
increasing corporate governance monitoring by the CEO and CFO.20
The second Sarbanes-Oxley Act provision relating to executive remuneration was
section 402, which imposed a prohibition on personal loans to directors or executive
officers. This provision tracked the contours of problems identified at a number of
US companies, including Enron and WorldCom, where executives had received huge
loans, sometimes totalling hundreds of millions of dollars, from their corporation.21
This was apparently a common, and relatively uncontroversial, remuneration
technique in the US prior to the Enron and WorldCom scandals.22
No. CV 09-1510-PHX-JWS (D. Ariz. July 22, 2009) (available at
http://www.wlrk.com/docs/comp21149.pdf). During Mr Jenkins' ten year tenure as CEO of
CSK Auto Corporation ("CSK"), the corporation had engaged in pervasive accounting fraud,
involving many senior officers. Id, para .
Savarese, "SEC Pursues Unprecedented Sarbanes-Oxley `Clawback'", The Harvard Law
School Forum on Corporate Governance and Financial Regulation, 1 August 2009 (available
SEC v. Jenkins, CV-09-01510-PHX-GMS, Notice of Motion and Motion to Dismiss (filed 15
September 2009), 1.
Id, 1, 4. Mr Jenkins' motion to dismiss condemned the s 304 action on the basis that "the SEC
openly proposes for the first time to wield the statute as a means to inflict punishment on
innocent executives". Id, 3. He argued that, properly construed, s 304 required personal
wrongdoing by the defendant as a precondition to forfeiture, and that the SEC's complaint in
the action was therefore "fatally defective". Id, 5.
See also s 302 Sarbanes-Oxley Act, which requires certification of financial information by
the CEO and CFO. See Gorman, "Are Corporate Executives Playing Russian Roulette?",
SEC Actions, 25 September 2009.
Romano, "The Sarbanes-Oxley Act and the Making of Quack Corporate Governance" (2005)
114 Yale L.J. 1521, 1538.
An alternative form of regulation might have been the use of governance strategies,23
to adjust the balance of power between shareholders and the board of directors.24 The
form of regulation was, however, notably absent from the Sarbanes-Oxley Act. The
refusal of the Act to grant shareholders greater power in relation to matters such as the
director elections process was described by two prominent Delaware judges at the
time as the "forgotten element" of the US reforms.25
Enron, and other contemporaneous scandals, also raised concerns about the
effectiveness of disclosure rules. Almost a decade earlier in 1992, SEC introduced
landmark changes to its executive remuneration disclosure rules,26 which were
designed to improve the transparency, and comparability, of executive pay
packages.27 Although at the time of their enactment, the SEC disclosure rules were
regarded as comprehensive,28 the scandals exposed flaws and deficiencies in the rules.
The SEC responded to these problems by announcing in 2006 the introduction of
stricter disclosure rules for executive pay to close existing loopholes in relation to
undisclosed executive perks.29
See Kraakman, Armour, Davies, Hansmann, Hertig, Hopt, Kanda and Rock, The Anatomy of
Corporate Law: A Comparative and Functional Approach, 37ff (2nd ed, Oxford University
Press, 2009), distinguishing between prescriptive "regulatory strategies" and "governance
strategies", which involve reallocation of power between a principal and agent via "agent
constraining" and "principal empowering" strategies (n 13).
The preamble to the Sarbanes-Oxley Act confirms a focus on protection of shareholder
interests over shareholder participation in corporate governance. It is an Act, according to the
preamble, "[t]o protect investors by improving the accuracy and reliability of corporate
disclosures made pursuant to the securities laws, and for other purposes".
Chandler and Strine, "The New Federalism of the American Corporate Governance System:
Preliminary Reflections of Two Residents of One Small State" (2003) 152 U. Pa. L. Rev. 953,
These changes have been described as "perhaps the best known changes in policy regarding
executive pay, at least among economists". See Dew Becker, "How Much Sunlight Does it
Take to Disinfect a Boardroom? A Short History of Executive Compensation Regulation"
(2009) 55 CESifo Economic Studies 434.
See generally Hill, "`What Reward Have Ye?' Disclosure of Director and Executive
Remuneration in Australia" (1996) 14 Company and Securities LJ 232.
The NACD Blue Ribbon Commission on Director Compensation, for example, praised the
1992 SEC rules as making it "virtually impossible to conceal any form, or meaningful
amount" of executive remuneration. SEC Report of the ACD Blue Ribbon Commission on
Director Compensation: Purposes, Principles, and Best Practices, June 1995, 19.
See SEC, Press Release, SEC Votes to Propose Changes to Disclosure Requirements
Concerning Executive Compensation and Related Matters, 17 January 2006. Key elements of
the reforms included:- alteration to the details of whose remuneration must be disclosed;
The US regulatory response to Enron provided an interesting contrast to reforms in
Australia and the UK, where legislative rhetoric focused on the need to strengthen
shareholder participation rights in corporate governance.30 One of the clearest
manifestations of this goal was the introduction of a non-binding shareholder vote on
executive pay.31 In Australia, the relevant provision, s 250R(2) of the Corporations
Act 2001 (Cth) (Corporations Act),32 requires shareholders of an Australian listed
company to pass a non-binding advisory vote at its annual general meeting, indicating
whether they adopt the directors' remuneration report.33 This provision was based on
an analogous provision introduced two years earlier in the UK.34 Unlike the US,
where precatory shareholder resolutions have a long pedigree,35 Australia and the UK
had no prior tradition in this regard.36
alterations to the required presentation of material to enhance clarity; required disclosure of
total compensation; expanded scope of components of executive remuneration requiring
disclosure; quantification of termination and change in control payments; and a reduced
threshold for disclosure of perquisites. See generally Lublin and Scannell, "They Say Jump:
SEC Plans Tougher Pay Rules", Wall Street Journal, 11 January 2006, C1; Scannell and
Francis, "Executive-pay Disclosure Takes Spotlight in U.S.", Wall Street Journal Europe, 17
January 2006, 1.
See generally Hill, "Regulatory Show and Tell: Lessons from International Statutory
Regimes" (2008) 33 Del. J. Corp. L. 819, 826. The Explanatory Memorandum to the
Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill of
2004, stressed the importance of improving shareholder participation and activism in
corporate governance. See Corporate Law Economic Reform Program (Audit Reform and
Corporate Disclosure) Bill 2003, Explanatory Memorandum, paras. 4.271-4.280.
See generally Hill, "Regulatory Responses to Global Corporate Scandals" (2005) 23 Wis. Int'l
L. J. 367, 413-414.
Section 250R(2) was introduced into the Corporations Act 2001 (Cth) by the Corporate Law
Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9
Act). See also s 249L(2) and s 300A Corporations Act 2001 (Cth).
See generally Chapple and Christensen, "The Non-Binding Vote on Executive Pay: A Review
of the CLERP 9 Reform" (2005) 18 Aust. J. Corp. L. 263.
The Directors' Remuneration Report Regulations 2002, S.I. 2002, No. 1986 (UK). The
provision is now found in s 439 of the UK Companies Act 2006. For a general discussion of
post-Enron reform developments in the UK, see Ferran, "Company Law Reform in the UK: A
Progress Report", European Corporate Governance Institute Law Working Paper No. 27/2005
(March 2005) (available at http://ssrn.com/abstract=644203), 24-28.
For historical background to precatory voting in the US under SEC Rule 14a-8, see Thompson
and Edelman, "Corporate Voting" (2009) 62 Vand. L. Rev. 129, 143-144. See also Ryan,
"Rule 14a-8, Institutional Shareholder Proposals, and Corporate Democracy" (1988) 23 Ga. L.
Rev. 97. Since the inception of SEC Rule 14a-8, shareholder proposals have shifted from
social responsibility to a focus on changing corporate governance. Thompson and Edelman,
A range of other post-Enron reforms were introduced in Australia under the
Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure)
Act 2004.37 These included enhanced remuneration disclosure under s 300A of the
Corporations Act, modification of provisions relating to termination pay,38 and the
introduction of a specific non-binding Remuneration Principle under the Australian
Securities Exchange (ASX) Corporate Governance Council's Principles of Good
Corporate Governance and Best Practice (ASX Principles of Good Corporate
Governance),39 exhorting companies to "remunerate fairly and responsibly".40
3. Two Interesting Current Questions
3.1 Are Corporate Excesses a "Foreign Phenomenon"?
Jurisdictions around the world, including Australia, are again grappling to find an
appropriate response to the issue of executive remuneration in the light of the global
financial crisis. Two interesting background questions have emerged from the
regulatory ether in this regard.
The courts had historically treated such resolutions as beyond shareholder power. See, for
example, RMA v Parker (1986) 6 NSWLR 517, 522.
See Sheehan, "The Regulatory Framework for Executive Remuneration in Australia" (2009)
31 Syd. L. Rev. 273, 275-276.
See generally Stapledon, "Termination Benefits for Executives of Australian Companies"
(2005) 27 Syd. L. Rev. 683. See also Sheehan and Fenwick, "Seven: The Corporations Act
2001 (Cth), Corporate Governance and Termination Payments to Senior Employees" (2008)
32 Melb. U. L. Rev. 199.
Paralleling the UK "comply or expain" disclosure-based model of corporate governance, the
ASX Principles of Good Corporate Governance operate on an "if not, why not" basis. See
generally, Hill, "Evolving Rules of the Game in Corporate Governance Reform" (1998) 1 Int.
J.Corp. Gov. 28, *.
ASX Corporate Governance Council, Principles of Good Corporate Governance and Best
Practice Recommendations (2003), Principle 9. See also ASX Corporate Governance
Council, Revised Corporate Governance Principles and Recommendations (2nd ed, 2007),
Principle 8. See generally Ablen, "Remunerating `Fairly and Responsibly': The `Principles of
Good Corporate Governance and Best Practice Recommendations' of the ASX Corporate
Governance Council" (2003) 25 Syd. L. Rev. 555.
The first question is one that is important in the Australian context, and was raised
explicitly by the Australian Government Productivity Commission (Productivity
Commission) in its April 2009 Issues Paper.41 This is whether corporate excess,
including excessive executive remuneration, is a problem for Australia, or whether it
is a "foreign phenomenon".42 The expression "foreign phenomenon" appears to be
code for an "American problem".
At first sight, there appear to have been strongly convergent international trends in the
structure of executive pay in recent years.43 The rise, and subsequent waning, of
stock options as a component of executive pay reflects this general trend.44
Nonetheless, executive remuneration is also an area where culture matters.45 Cultural
differences between various jurisdictions are reflected in levels of pay, societal
tolerance for income inequality,46 and attitudes to remuneration disclosure.47 Social
norms concerning executive pay can also change across time in a single jurisdiction.
It has been suggested, for example, that changing social norms in this regard in the
United States may explain the steep rises in executive compensation, wealth
Australian Government Productivity Commission, Regulation of Director and Executive
Remuneration in Australia, Issues Paper (April 2009).
See Australian Government Productivity Commission, Regulation of Director and Executive
Remuneration in Australia, Issues Paper (April 2009) 4.
For a general discussion of the theories of convergence versus path dependence theory in
comparative corporate governance, see Gordon and Roe (eds), Convergence and Persistence
in Corporate Governance (2004); Hill, "The Persistent Debate about Convergence in
Comparative Corporate Governance" (2005) 27 Syd. L. Rev. 743.
See, for example, Johnston, "American-style Pay Moves Abroad: Importance of Stock
Options Expands in a Global Economy", ew York Times, 3 September 1998, C1; Ferrarini
and Moloney, "Executive Remuneration in the EU: The Context for Reform" (2005) 21 Oxf.
Rev. Econ. Policy 304. Use of stock options around the world in recent years has declined.
See Mercer, Executive Remuneration Perspective: Perfecting Long-Term Incentive
Remuneration (14 September 2008) (available at
See, for example, Levitt, "Corporate Culture and the Problem of Executive Compensation"
(2005) 30 J. Corp. L. 749, 750 (discussing the significance of culture in relation to the
structure and operation of the board of directors).
See, for example, Conyon and Murphy, "The Prince and the Pauper? CEO Pay in the United
States and United Kingdom" (2000) 110 Econ. J. F640, F646-647.
See, for example, Ferrarini and Moloney, "Executive Remuneration in the EU: The Context
for Reform" (2005) 21 Oxf. Rev. Econ. Policy 304.
concentration48 and income inequality49 in recent decades.50 Some commentators,
however, argue that rising inequality has now ceased in the United States.51
How do levels of executive compensation in the US and Australia compare?
Executive remuneration in the US steadily increased since the mid-1970s.52
However, it was during the 1990s, the height of the corporate governance movement,
that US executive remuneration skyrocketed. Between 1993 and 2003, the average
CEO compensation at S&P 500 firms rose by a dramatic 146%.53 The increase in
CEO pay levels in real terms greatly outpaced increases in the pay of average US
workers there was a 45% growth in CEO pay, compared to 2.7% for the average
worker.54 This disparity was even more striking in some countries, which came to
US-style stock compensation late in life. In the Netherlands, for example, real CEO
See Saez, Striking it Richer: The Evolution of Top Incomes in the United States (Update with
2007 estimates), noting that concentration of wealth has increased dramatically in the United
States in recent decades, and by 2007 rivalled that existing in 1928 at the pre-Depression stock
market peak. Id, 2.
See Dew-Becker, "How Much Sunlight Does it Take to Disinfect a Boardroom? A Short
History of Executive Compensation Regulation" (2009) 55 CESifo Economic Studies 434,
stating that since 1980 income inequality in the US has increased "by almost any measure"
(id, 434). According to Dew-Becker, reasons for this divergence included factors such as
increased trade and immigration, reduction of the real minimum wage and a decline in
unionism (id, 435). Cf however, Gordon, "Misperceptions about the Magnitude and Timing
of Changes in American Income Inequality" (September 2009, NBER Working Paper 15351),
arguing that "[t]he rise in American inequality has been exaggerated in magnitude and its
impact is now largely in the past" (at 31).
See Piketty and Saez, "Income Inequality in the United States, 1913-1998" (2003) 118
Quarterly J. Econ. 1, 34-35, arguing, for example, that the Great Depression and World War
II had a great impact on contemporaneous social norms regarding income inequality. See also
Frydman and Saks, "Executive Compensation: A New View from a Long-Term Perspective,
1936-2005" (June 2008, NBER Working Paper 14145), 33.
See Gordon, "Misperceptions about the Magnitude and Timing of Changes in American
Income Inequality" (September 2009, NBER Working Paper 15351), 32.
Piketty and Saez, "Income Inequality in the United States, 1913-1998" (2003) 118 Quarterly
J. Econ. 1; Frydman and Saks, "Executive Compensation: A New View from a Long-Term
Perspective, 1936-2005" (June 2008, NBER Working Paper 14145).
See Bebchuk and Grinstein, "The Growth of Executive Pay" (2005) 21 Oxf. Rev. Econ. Policy
283. Average CEO compensation at S&P 500 firms rose from US$3.7 million to US$9.1
million between 1993 and 2003. The average compensation of the top five executives
increased 125% from US$9.5 million to US$21.4 million during this period. Id.
See Ebert, Torres, Papadakis, International Institute for Labour Studies Discussion Paper
DP/190/2008, Executive Compensation: Trends and Policy Issues (2008) (available at
pay grew by 192% compared to 2.4% for the average worker.55 US CEOs have
nonetheless tended to receive vastly higher levels of remuneration than their
counterparts in other jurisdictions.56
In Australia, the disparity in growth of CEO pay compared to average worker pay was
less pronounced. Executive salaries in Australia have risen approximately three times
the amount of ordinary full-time employee wages.57 From 2001-2007, both the
median fixed remuneration (ie non performance-based elements of Australian CEO
pay) and the median total remuneration had increased by around 96% in total.58 This
compared to a 32% increase in average Australian adult weekly earnings during the
same period.59 Nonetheless, there has still been a significant escalation in CEO pay
packages in Australia. A 2008 ACSI report on executive remuneration practices in
the top 100 listed Australian companies found that average CEO pay had increased
from A$3.77 million in 2005 to A$5.53 million in 2007.60 A common explanation for
this steep rise in executive pay is the fact that increasingly Australian companies need
to compete internationally, and now appoint executives from a "mobile worldwide
executive talent pool".61 Another potentially relevant factor is firm size. Recent US
empirical research suggests that, since the mid-1970s,62 American CEO pay has been
See Thomas, "Explaining the International CEO Pay Gap: Board Capture or Market Driven?"
(2004) 57 Vand. L. Rev. 1171, 1173-1175. Various explanations have been given for the
extreme escalation of pay in the US. See, for example, Bebchuk and Grinstein, "The Growth
of Executive Pay" (2005) 21 Oxf. Rev. Econ. Policy 283, 298-302, discussing competing
explanations offered by (i) the arm's length bargaining model and (ii) the managerial power
See Shields, "Setting the Double Standard: Chief Executive Pay the BCA Way" (2005) 56 J.
Aust. Pol. Econ. 299, 303.
ACSI, Media Release, Top 100 CEO Pay Research Released, 27 October 2008.
Ibid. See also Australian Government Productivity Commission, Regulation of Director and
Executive Remuneration in Australia, Issues Paper (April 2009), 9.
See ACSI, Media Release, Top 100 CEO Pay Research Released, 27 October 2008.
Tarrant, "Payday Paralysis" (2009) 79 I THEBLACK 28 (CPA Australia).
Frydman and Saks, "Executive Compensation: A New View from a Long-Term Perspective,
1936-2005" (June 2008, NBER Working Paper 14145), 1, 3, 17.
strongly correlated with increases in market capitalisation.63 There has been a
dramatic increase in the market capitalisation of a number of Australian companies in
the last decades. The current market capitalisation of BHP Billiton, for example, is
$200 billion, compared to $16 billion in 1989.64
Plato believed that no-one in a community should earn more than five times the pay
of the lowest paid worker,65 but this ideal has clearly taken root neither in the US, nor
Australia. The 2008 annual reports of Australia's top fifteen companies reveal that,
excluding share-based compensation, the CEOs earned approximately 135 times more
than the average Australian employee.66 In the US, the average executive manager in
the largest fifteen US firms earned around 500 times more than an average employee
3.2 Did Executive Pay Cause or Contribute to the Global
The second interesting current question about executive remuneration is the extent to
which it actually caused, or contributed to, either the Enron scandal or the global
financial crisis. Differences of opinion emerge about the role of executive
compensation in these events.68
See, for example, Gabaix and Landier, "Why Has CEO Pay Increased So Much?" (2008) 123
Quarterly J of Econ 49. According to the authors, six-fold increases in CEO pay in the United
States from 1980-2003 can be correlated with identical increase in market capitalisation of
large US corporations during this period.
Australian Government Productivity Commission, Productivity Commission Inquiry Report
No. 49, Executive Remuneration in Australia, 19 December 2009, XVIII.
Cited in Crystal, In Search of Excess: The Overcompensation of American Executives (1991),
Tarrant, "Payday Paralysis" (2009) 79 I THEBLACK 28 (CPA Australia).
The disparity is considerably higher than in 2003, when the average executive manager in the
largest 15 US firms earned approximately 300 times more than an average US employee.
International Labour Organization and International Institute for Labour Studies, World of
Work Report 2008: Income Inequalities in the Age of Financial Globalization (2008),
Executive Summary, 3.
See, for example, Tuna and Lublin, "Risk vs. Executive Reward Obama Seeks Better
Controls, but Experts Split over the Impact", Wall Street Journal, 15 June 2009, B6.
Professor Coffee considered that remuneration practices were one of three possible
causes of the collapse of Enron (the others were gatekeeper problems and market
"herding").69 However, the US regulatory response to Enron suggests that audit
failure was widely accepted as the real culprit.70
If there was scant recognition of the potential connection between executive
compensation practices and corporate scandals like Enron, the same cannot be said in
relation to the global financial crisis. Many commentators have argued that
remuneration practices directly contributed to the crisis by rewarding short-term profit
that encouraged excessive risk-taking, particularly in the banking sphere,71 and to date
there have been relatively few dissenting voices.72
The Australian and US governments have also suggested that a close nexus exists
between executive compensation and the global financial crisis. In 2008, the
Australian Prime Minister, Kevin Rudd described the financial crisis as a consequence
of "extreme capitalism",73 characterized by "[o]bscene failures in corporate
governance which rewarded greed without any regard to the integrity of the financial
See generally, Coffee, "What Caused Enron?: A Capsule Social and Economic History of the
1990s" (2004) 89 Cornell L. Rev. 269.
See Coffee, "Gatekeeper Failure and Reform: The Challenge of Fashioning Relevant
Reforms" (2004) 84 B.U. L. Rev. 301, 321ff; Gordon, "What Enron Means for the
Management and Control of the Modern Business Corporation: Some Initial Reflections"
(2002) 69 U. Chi. L. Rev. 1233, 1237ff.
See, for example, Crotty, "Structural Causes of the Global Financial Crisis: A Critical
Assessment of the `New Financial Architecture'" (2009) 33 Cambridge J of Econ 563, 565
(stating that "profits and bonuses are maximised in the boom by maximising leverage, which
in turn maximises risk"). See also Avgouleas, "The Global Financial Crisis, Behavioural
Finance and Financial Regulation: In Search of a New Orthodoxy" (2009) 9 J. Comp. L. Stud.
23, 42-45; Ciro and Longo, "The Global Financial Crisis: Causes and Implications for Future
Regulation: Part 2" (2010) 25 J. Int. Banking L. and Reg. 9, 16, 17; Bebchuk and Spamann,
"Regulating Bankers' Pay" (2010) 98 Geo. L. J. 247, 255-268.
See, however, Core and Guay, Is There a Case for Regulating Executive Pay in the Financial
Services Industry?, 12-13, Working Paper, Jan. 25, 2010 (available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1544104), arguing that specious,
backward-looking arguments have been used to find flawed compensation practices
responsible for the global financial crisis. See also Fahlenbrach and Stulz, Bank CEO
Incentives and the Credit Crisis, Charles A Dice Center Working Paper No. 2009-13 (July
2009) (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1439859) Cf Bebchuk
and Spamann, id, 267-269.
See Bartlett, "Global crisis `failure of extreme capit
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