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Dave Wheeler for HBR

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.

Some researchers have argued that they’re a failed experiment. 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. Growing inequality has contributed to the decline in several social phenomena, including mental health, and has been cited as a threat to democracy itself.

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.

And is it working? Yes, so far. The country has witnessed numerous first strikes with boards quickly backtracking to save their skin. Among the crowd are some of the nation’s largest companies – CSL, Woodside Petroleum, AGL Energy, Boral, and Goodman Group. The mere threat of a first strike has had boards treading carefully. It’s clear that boards are starting to get the message from the national government, shareholders, the public, and the media that excessive executive packages are unacceptable.

More than that, smart businesses are stepping forward to proactively embrace the changing culture. One business which typifies the change is Wesfarmers. The company is Australia’s eighth largest by market capitalization and an opinion leader in business circles. Highly diversified across food retailing, hardware, office supplies, department stores and industrial products, its current CEO, Richard Goyder, is stepping down to be replaced by an internal appointee, Rob Scott. Scott will earn up to $4 million less than his predecessor agreeing to a $1 million cut to fixed pay and a $3 million cut to bonuses.

This shift is clearly coming from societal pressure. As Wesfarmers chairman, Michael Chaney, told the Australian Financial Review (AFR) “We recognize changes in the market that have seen downward pressure on fixed pay levels for CEOs and reductions in overall reward opportunities…[We] believe that this package and those of other senior executives in the Group are appropriate and in line with contemporary market practice of peers.”

And the pressure continues. The current Australian Government, importantly from a different party to that which introduced the “two strikes” legislation, has gone in hard on Australia’s “big four” banks. In its May 2017 Budget, the government proposed a bank tax, like that in the U.K., and has clamped down on CEO pay. The banks, which enjoy a government-guaranteed status and owe much to the government for their security and profitability, have come up short in responding to a variety of customer issues. With the full backing of the public, the government announced a clampdown on how bonuses are paid and greater scrutiny of bank executives. Even the Prime Minister, Malcolm Turnbull, has waded into the issue. He was quoted in the AFR calling it “almost a cult of excessive executive CEO remuneration.”

It’s also important to note that the mood in Australia is not exactly “anti-wealth.” No one is arguing that CEOs and entrepreneurs don’t deserve to be highly paid – provided they pay their fair share of taxes. These individuals have often taken huge risks, and very few succeed. Moreover, their wealth is often derived from the ownership of shares in the enterprise they founded. If someone wants to literally bet their house on the success of their business and ends up a billionaire, then most Australians would say good luck to them. The public’s concern is with professional managers who have risked little, but who think they have a right to earn Bill Gates money.

That sentiment seems to be rising in other countries, too. Regulators and policy-makers in those countries can look to the Australian model for one example of how CEO pay might be reined in without heavy-handed regulation, and smart boards can get out ahead of the curve to satisfy shareholders, improve internal morale, and win the trust of the public.

Original Article