Monday, May 9, 2011

Stevens sells his moral authority

Everyone who's seen The Godfather knows how the Mafia works: it's more than happy to do you a favour, but once it has it owns you forever. Our coterie of grossly overpaid chief executives and directors operates much the same way.

They're a mutual pay-raising society - you raise my pay and I'll raise yours - and more than a year ago they induced the governor of the Reserve Bank, Glenn Stevens (a most estimable fellow in every other respect), to join their club.

Stevens accepted the recommendation of the Reserve board's "remuneration committee" that his salary be raised to $1.05 million a year. This is at least double what the heads of federal departments get, and far more than almost all other central bank chiefs get.

It's about five times what the US Federal Reserve chairman, Ben Bernanke, gets. Stevens's pay has jumped 85 per cent in five years, equivalent to annual rises of 13 per cent.

This compares with a former governor's "line in the sand" many years ago setting 4.5 per cent a year as the maximum non-inflationary pay rise for ordinary mortals (a limit that these days would be too high because of our weaker productivity growth).

The price of Stevens's admission to the lowest rung of the indefensible-salaries club is the loss of his - and the Reserve's - moral authority on the question of excessive pay rises for punters. (He also forfeits the ability to be at all critical of the example set by his fellow club members.)

The chances of skilled-labour shortages turning into a general round of excessive wage increases in the next few years are high. If that happens, Stevens has lost the ability to fight it with "open-mouth operations" in the way his predecessor, Ian Macfarlane, sought to talk down the housing boom in 2003 - with some success. No, Stevens will be left with only one instrument: higher interest rates. And consciousness of his self-inflicted impotence in the moral suasion department may lead him to raise rates just that little bit higher than otherwise.

If so, he will have added injury to his insult to wage slaves. The more some workers seek a fraction of the percentage wage settlements Stevens has been accepting, the more others of them will be priced out of a job.

But how does it come about that Stevens is now paid so much more than other central bank bosses? The rest have boards composed largely of economists and public servants. Pretty much only in Australia is the board composed largely of business people.

So what more is natural than this group of chief executives and professional board members seeking to run chief-executive remuneration at the Reserve the way they run it on money-obsessed private-sector boards? And what is more natural than them cutting a nice guy like Stevens in on the easy dosh?

Studies by psychologists show that people engaged in ethically dubious practices are commonly anxious to convince others - and themselves - that "everyone's doing it". And now the governor's just as morally compromised as I am. Told you.

The Reserve's delay in making Stevens's pay rise public - or even privately informing the Treasurer - for almost a year suggests it knew full well it was out of line with "community expectations" and had done something to be ashamed of.

The arguments members of the Reserve's "remuneration committee" have offered in defence of their actions are characteristically weak. The Reserve has to compete with "lucrative offers in the financial sector" to retain staff, we're told.

At the level we're talking about, that's rubbish. These guys aren't real bankers, they're economist bureaucrats who know a lot about monetary policy, but not much else. They could never run a real bank; some could run a dealing room or be a chief economist.

If any of the Reserve's top people have had "lucrative offers" lately it would be nice hear about them. I'll bet they haven't. Even if they had, they wouldn't be tempted.

Anyone who hangs in at the Reserve long term, and thinks they have a shot at being governor, is motivated by something no private-sector job can offer: the knowledge you're playing a significant role in steering the Australian economy. As a bonus, you get to sign banknotes.

It's true salaries need to be reasonably competitive with the financial sector much lower down in the Reserve hierarchy. That's where good young people are often tempted away - especially since the intellectual firepower needed to progress up the Reserve's ranks is formidable.

But that's the joke. In line with the ethic of the indefensible-salaries club, lower salaries aren't increased commensurately. It's demigods only. Little trickles down.

Asked how the yawning gap between Stevens's and Bernanke's salaries could be justified, one genius on the "remuneration committee" argued it was all about how much you could earn after you ceased being governor. Bernanke would command $250,000 a speech. That's a market-forces argument?

In truth, retiring Reserve governors - who have excellent superannuation - can earn vastly higher incomes by accepting all the positions on boards they're offered. Their inside knowledge allows them to become professional directors overnight - and help jack up other top people's salaries. The only constraint is their personal ethics.

It seems clear the Remuneration Tribunal intends to raise the salaries of federal department heads to reduce the gap with Stevens's $1.05 million, on the grounds of comparable responsibilities.

So we start with a bulldust market-forces argument and progress to fairness arguments. When workers argued this way in the old days it was called "comparative wage justice" and every economist condemned it as economically irresponsible. The demigods live by different rules.

Letter From Donald McGauchie to the Treasurer - 18 September 2009

Letter From the Treasurer to Donald McGauchie - 15 September 2010

Letter From Jillian Broadbent to the Treasurer

Letter to the Editor, May 12:

I write as chairman of the Reserve Bank Board's Remuneration Committee to correct a misinterpretation in a recent article by Ross Gittins (BusinessDay, 9/5) that claims there had been an 85 per cent increase in the remuneration of governor of the Reserve Bank Glenn Stevens between 2005 and 2010.

The cumulative pay rise over that five-year period was, in fact, 34 per cent. The numbers used by Gittins are not comparable owing to the changed accounting treatment of non-cash benefits between 2005 and 2010.

Roger Corbett, chairman, Remuneration Committee, Reserve Bank Board

Last Monday I wrote that the Reserve Bank governor's pay (I should have called it his total remuneration package) of $1.05 million a year had jumped 85 per cent in the past five years. This calculation was based on information in the Reserve's annual reports.

Now the chairman of the Reserve's remuneration committee writes that the figures used in this calculation are not comparable because of the changed accounting treatment of non-cash benefits. He says the cumulative pay rise over the period was in fact 34 per cent.

I have been unable to confirm his calculation from publicly available information. I am puzzled by it because the figure used as the base for my calculation, $570,000, was described in the Reserve's 2005 annual report as the governor's "remuneration package", which included "cash salary, the Reserve's contribution to superannuation, housing assistance, motor vehicles, car parking and health insurance and the fringe benefits tax paid or payable on these benefits".

The letter the previous chairman of the remuneration committee wrote to the Treasurer in September 2009 (made public because of a freedom-of-information request) advised that the value of the governor's total remuneration package had risen by 33 per cent just between 2008 and 2009.

I note that the incorporation into the governor's base salary of "other allowances (including motor vehicle)" worth $44,600 a year - which also included an unused entitlement to spouse travel, valued at $25,800 a year - led to a commensurate increase in his employer's superannuation contribution, which is made at the rate of 21.3 per cent.

Monday May 18