Fund manager: Stop excessive executive pay

Simon Marais is the Managing Director and portfolio manager of Allan Gray Australia. The firm practices contrarian investing and Dr Marais is never one to shy away from controversy. This includes his recent call for more effective oversight and a more pro-active approach by the nation’s largest investors to reign in some of the ridiculous pay packets CEOs receive. As The Australian newspaper recently reported, Dr Marais is “proposing an alliance between the country’s big superannuation funds to vote against structures that are rated below par in a benchmarking exercise.”

It would be a welcome improvement, and given the deep thinking and analysis that is a hallmark of Dr Marais’ style, he has no doubt considered alternative approaches. So it is interesting that he is suggesting a benchmarking exercise, as this would appear to be one of the problems with the current practice of remuneration, whereby boards fail to use their common sense to set pay and instead pay a consultant to advise them — firstly, on what ‘peer’ companies are paying their CEOs and secondly, based on this peer benchmark what they should pay their own CEO. One wonders if these same boards outsource all their thinking!

Interestingly, while more reasonable salaries are often prevalent in founder-controlled companies, Allan Gray’s largest positions are all very much corporate entities. Its flagship Equity Fund’s current three largest positions are: National Australia Bank (ASX: NAB), SP AusNet (ASX: SPN) and Fairfax Media (ASX: FXJ).

Foolish takeaway

Shareholders effectively outsource the oversight of a company to the Board of Directors. This oversight includes the setting of the CEO’s salary, which at times is a very meaningful percentage of a company’s after-tax earnings. While shareholder interests are of course well served by retaining a high quality executive, payment above and beyond that level is money that could be paid to shareholders or reinvested in growing the value of the company, not lining the pockets of a manager.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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