The Commonwealth Bank has managed to garner some rare favourable publicity in recent days, following the announcement to staff that CEO, Ralph Norris would take a 10% pay cut next year. At the same time, the bank stated that staff earning less than $100,000 annually would receive a 1.5% pay rise from 1 July 2009.

The public relations exercise is of course little more than a shrewd sales pitch with the actual effect of the move little more than a rounding error for Norris. In 2007/08, Norris received total remuneration of $8.66 million (2006/07: $6.6 million). The voluntary pay cut will result in a fixed pay drop of around $300,000 — this would represent an approximate 3.5% reduction in of Norris’s total remuneration based on 2008 earnings (using 2006/07 figures, the pay cut would be only 2.23% of total remuneration).

Also, while Norris has taken moves to slightly reduce his pay his remuneration is still substantially higher than that of his predecessor, David Murray.

Murray, who successfully steered CBA from public ownership (and now heads up the Future Fund) was paid a relatively miserly $4.98 million in 2004/05. Murray’s fixed pay that year was $1.75 million, compared with Norris’ fixed pay last year of $3.1 million. Despite the pay differential, few would suggest that Norris’s abilities as a CEO are twice as much as those of the highly respected Murray.

Further, while the 3.5% cut in pay is a step in the right direction, it should be viewed in light of CBA’s share price, which has dropped by approximately 40% from its November 2007 high.

That context not only includes a weakened share price, but the fact that the CBA (along with the other major banks) currently enjoy a uniquely protected commercial position courtesy of the Federal Government.

Few businesses enjoy a highly regulated oligopoly, in which billions of dollars of income is able to be generated through legally questionable penalty fees imposed on customers. Even fewer businesses are offered virtually free money from a Federal Government, as the large banks do in the form of a Federal Government wholesale funding guarantee. As Charlie Aitken noted in the Eureka Report:

The Big Four are charged 70 basis points by the government [for their funding], Suncorp 100 basis points and the regionals (Bendigo & Adelaide and Bank of Queensland) 150 basis points. This obviously translates to a margin advantage for the major banks, with the majors now averaging net interest margins of 2.05%, Suncorp 1.8% and the regionals 1.5%.

It can be argued that the regionals are put at a competitive disadvantage by the staggered nature of the government guarantee fee structure. They simply can’t issue new mortgages at the same rates as the majors unless they sacrifice margin. I believe the regional banks have put this theory to the Treasurer and it’s believed he is sympathetic to any ideas that might increase domestic banking competition.

CBA (along with other banks and credit unions) are backed by deposit guarantee provided by the government which further serves to lower their funding costs. The guarantee, which is provided by taxpayers, lowers the costs of financial institutions and directly improves their profitability. The deposit guarantee, while benefiting certain institutions (such as the CBA), is allegedly “causing distortions in the marketplace and is drying up other sources of finance from the non-bank sector” according to Master Builders Association head, Wilhelm Harnisch.

Given the big four banks are guaranteed by the Government, arguably, pay levels should approach that of other government backed organisations. Very few public servants earn more than $1 million, let alone many multiples of that. So while Norris’s gesture is a start, we should not get carried away praising an organisation that is actively supported by taxpayers handing over more than $8 million a year to their top executive.