Business Council Ignores Evidence on Performance Pay

The Business Council of Australia recently released an economic action plan for Australia. One among a number of recommendations is to devolve power over teacher salaries to school principals and allow them to pay teachers according to their performance.

No evidence is offered to support the recommendation. If the BCA had looked it would have found that the weight of research evidence shows that performance pay has no effect on student achievement (see here and here). The deputy director for education at the OECD, Andreas Schleicher, has said that the international evidence reveals “no relationship” between student test results and the use of performance pay.

Indeed, the BCA should have looked no further than the effect of performance pay for company executives amongst its own affiliates. The evidence shows absolutely no correlation between company performance and executive pay.

According to the financial commentator, Alan Kohler, the complex remuneration structures of Australia’s large companies are all designed to reward performance, but in reality, the pay cheque of a company’s CEO is more likely to simply reflect the size of the company and not its performance.

Kohler reported the results of an analysis of executive pay in Australia’s top 200 companies by the CLSA Asia-Pacific Markets investment bank. It shows no relationship between executive pay and total shareholder return (TRS – see chart below) and no relationship between executive pay and return on equity. He concluded that “it’s perfectly clear that salary size makes no difference to performance”.

The only factor with which executive salaries bear any relationship is the size of the company: big companies pay more, but it doesn’t make any difference to their performance.

Given the lack of any relationship between executive pay and company performance, Kohler called on industry investment funds “to do something about the pillaging of companies by the executive classes in the name of performance that doesn’t exist”.

The CLSA investment bank analysis that executive pay has no relationship to company performance is confirmed by leading international business academics. For example, an article published in the Harvard Business Review last year shows that performance pay for business leaders has led to skyrocketing CEO salaries in recent decades. However, salary increases bear little relationship with actual corporate performance and, according to the authors, remains as “weak as ever”.

If performance pay does not work to improve company performance, one wonders how the Business Council can believe that it will improve school and student performance. Clearly, performance pay is an article of faith for the Council. It should be seen for what it is – a myth.

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