08/02/2012 - 10:41

Snip off the top as pay cuts follow crisis

08/02/2012 - 10:41

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The emerging pattern of parsimony should, over time, filter down through all levels of the corporate world.

The emerging pattern of parsimony should, over time, filter down through all levels of the corporate world.

AUSTRALIA tends to follow global trends and the current trend that ought to be keeping company executives awake at night is a particularly nasty one – shrinking pay packets.

Long overdue, according to business bashers on the left side of politics, it seems that Europe’s financial crisis has triggered a reversal in the pattern of constantly rising rewards for senior managers, especially bankers.

Middle managers will be watching what happens most closely because they are confronting a pincer squeeze of tougher conditions above them, and higher wages for those below them, as demonstrated in recent decisions by Fair Work Australia that have awarded generous rises for the lowest paid workers in the community.

The lower end of the workforce is a topic for another day. What’s interesting in the overseas trend is a series of events that point to tougher times for company chief executives and directors, such as:

• stripping former Royal Bank of Scotland chief executive, Fred Goodwin, of his knighthood for mismanagement and excess executive rewards – the only explanation as he has not committed a criminal offence;

• the new chief executive at the same bank rejecting, after encouragement to do so, a $1.5 million pay rise;

• the outgoing chief executive of Deutsche Bank, Josef Ackermann, warning of a “social time bomb” if the wealth inequality gap widens further – code for cut executive pay, or encourage executives to make bigger donations to charity (Ackermann has just received a $10 million bonus); and

• lower transfer prices for British soccer players. Last year’s record spend of $335 million on football talent during the January transfer window dropped last month to $75 million.

Whether it’s bank bosses rejecting a pay rise, issuing a social dislocation warning, or forfeiting a gong, there is a pattern of parsimony emerging which should, over time, filter down through all levels of the corporate world.

The reason for this new-found mood is linked to the austerity measures being forced on citizens in the debt-laden eurozone who are, in turn, are demanding that the fat cats among them share the pain. 

Which leads to the question of, how much pain? The answer is a lot.

If you look back to a study that surfaced in 2009 during the first phase of the GFC, wages (and those contentious bonuses bankers award themselves) could be slashed over the next few years.

Thomas Philippon, associate professor of finance at New York University’s Stern Business School, and Ariell Reshef from the economics faculty at the University of Virginia, found that bankers are hammered after periods of great financial upheaval.

One of their calculations went like this. At the start of the 20th century, bankers were paid roughly the same as other professionals. Then came the boom years leading to the 1929 stock market crash, a period when banker’s pay rose to be 1.7 times higher than their professional peers – people such as accountants, engineers, doctors, and lawyers.

After the crash, the pay ratio fell back to near-parity, and stayed that way for about 30 years, rising again to a ratio of 1.7 times more than other professionals by 2006.

Today, with an estimated 100,000 banking jobs already wiped out worldwide, including thousands in Australia, the retreat back to parity could be under way, again, as the volume (and value) of business written by banks contracts.

Bonuses have certainly been cut, middle management trimmed and backroom functions outsourced. Soon we might even see high-profile chief executives take a pay haircut, something very few people ever imagined to be possible.

Mining offshore

GLENSTRATA, or XGlen, or whatever new name is chosen for the merged Xstrata and Glencore, will be a seriously interesting beast in the resources world, and not just because it will be big; the real interest lies in what could be its unfair tax advantage.

While the details of how and when Xstrata and Glencore will become one $88 billion company are still being worked out, it is certain that the merged entity will retain its Swiss tax base.

There is nothing illegal about a mining and commodity trading business having a head office in a country that does very little mining. Lots of other businesses have been attracted to the low-tax environment of Switzerland, especially in the Cantons, which charge virtually no corporate tax.

What will become interesting, however, is when the $88 billion GlenStrata/XGlen locks horns with its rivals, such as BHP Billiton or Rio Tinto, in a takeover bid – perhaps for lacklustre Anglo American.

That’s when a low-tax domicile becomes a distinct advantage, permitting the Swiss company to pay that little bit extra to land the deal.

If that happens, and a low tax rate does become an unfair advantage for GlenStrata/XGlen, then the heat will be on the other big miners to consider a similar relocation to Switzerland, or some other tax haven.

It’s even possible that BHP Billiton or Rio Tinto could consider moving their tax domicile out of Australia; now there’s a conversation starter.

Vale Valemax

AUSTRALIA’S iron ore miners do not need a helping hand in earning high profits, but two recent events have delivered them a double windfall.

First bonus came with news that Brazil’s iron ore giant, Vale, has been sent a stinging rebuke by China over the use of ultra-big iron ore carries.

The 400,000-tonne Valemax carriers, which are almost double conventional Capesize bulk carriers, are designed to offset the two-week shipping-time advantage Australia’s iron ore mines have over Brazilian mines.

Unfortunately, China has told Brazil it doesn’t want Valemax ships in its harbours. Too big and too dangerous, says China.

While the Valemax dispute will eventually be settled, perhaps with a discount on next year’s iron ore contracts, the Australian miners are also enjoying the benefit of the lowest shipping rates for bulk carriers in 25 years.

The plunge in hire costs from $32,000 a day before Christmas to around $6,000 a day last week has been caused by a surplus of Capesize ships, and the introduction of the Valemax vessels.

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“Fame is proof that most people are gullible.”

Ralph Waldo Emerson


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