Health fund pay to make you sick

From a public relations point of view, the timing certainly wasn’t good. In the same week that private health insurance premiums rise by 5.6 per cent, it’s been disclosed the new CEO of Medibank, our biggest health insurer, will have a potential annual pay packet of $6 million – 200 per cent more than his predecessor took home last year.

And that predecessor himself scored a massive pay rise just by being CEO when Medibank was privatised and listed on the stock market in 2014. I guess Medibank CEOs can afford to pay their own private health insurance.

Perhaps with a sub editor’s sense of mischief, the Australian Financial Review reported the appointment of the new boy, Craig Drummond, with the headline “Medibank CEO to tackle high costs”. Looks like excessive CEO pay isn’t considered a cost.

There are two stories here: one about rising health insurance premiums, the other about on-going excessive and unwarranted CEO pay in the private sector.

The one sure winner from the privatisation of a government corporation (e.g. Medibank, Telstra, Qantas et al) or de-mutualisation of a mutual (AMP, St George Building Society, NIB) is the CEO.

The same job paying a merely rich salary in government or mutual ownership one day is suddenly worth a multiple of that the next.

It's a powerful incentive for ambitious but not necessarily especially talented managers to seek out a potential privatisation or demutualisation target and agitate for the change that will so generously reward them.

And it’s an indictment of the boards that meekly go along with the idea that the CEO of a company listed on the stock market must be paid a vastly more than someone doing the same job at a non-listed entity.

George Savvides was one of Australia’s highest-paid public servants when he was running the government-owned Medicare, receiving $1.2 million a year for his efforts. Nice. But that pay packet soared to a potential $3.99 million on November 25, 2014, when Medibank was privatised and listed.

That sum included a $750,000 bonus for completing the float. That is, he received a bonus for doing the job he was being well paid to do.

Fairfax Media has reported that Mr Savvides took home $2 million in the year to June 2015 thanks to a base salary of $1 million and various incentive payments and performance rights making up the rest. His successor, Mr Drummond, starts with a base pay 50 per cent higher at $1.5 million and potential incentive payments of another $4.5 billion if he achieves various performance benchmarks.

Is he worth it? Probably not. Very, very few CEOs are.

Much of my job for about a third of a century has been to observe the rise and fall of CEOs. Occasionally you witness a genuinely excellent leader make a massive contribution to the organisation they take over – Paul Simons at Woolworths back in the day, Paul Anderson turning around BHP, Guy Russo at Kmart – but that’s very rare.

Most CEOs of big businesses pick up where someone else has left off and don’t make any more difference to the organisation’s fortunes than the next candidate. They rely on the same executive team as the next person.

Sometimes they make it worse, sometimes a bit better, but always they are paid a motza.

In the case of our ridiculously overpaid big bank CEOs, most of their corporate performance comes from the market share they already have, the overall economy’s health and the level of bank supervision that stops them making big mistakes. The CEO has little to do with it.

And I’m always bemused that the board apparently thinks their CEO will work harder/smarter if they’re paid $5 million rather than $4 million, that they deserve a bonus for simply doing the job they’ve been hired to do.

Given the racket of benchmarking CEO pay against what are allegedly comparable companies, it’s possible for CEOs to pick up bonuses even when the company goes backwards, just as long as it goes backwards slower than its peers.

And you know the thing about the best CEOs? They don’t really do it for the money. Paul Simons was and remains disdainful of highly-paid CEOs – he particularly thinks linking high executive pay to share prices sows the seeds for corporate destruction – and Paul Anderson told me on camera that he was overpaid at BHP, but was hardly going to knock it back if the board was silly enough to pay him so much.

So if you’re a Medibank customer noticing how much more expensive your premiums are, take comfort in the thought that you are potentially contributing to paying the CEO six times more than the job was worth a couple of years ago.

 

Michael Pascoe is one of Australia's most respected finance and economics commentators with over four decades in newspaper, radio, television and online journalism. He regularly appears on Channel 7's Sunrise and news programs and is a regular conference speaker, MC and facilitator.