Top three earners (from left): David Hisco, ANZ Banking Group, Mark Adamson, Fletcher Building, Theo Spierings, Fonterra. Photo / NZME.
Top three earners (from left): David Hisco, ANZ Banking Group, Mark Adamson, Fletcher Building, Theo Spierings, Fonterra. Photo / NZME.
Pay is up at the top of New Zealand's biggest companies, but are profits keeping pace? Hamish Fletcher checks the long-term trend.
It's been a rewarding decade for the bosses of New Zealand's biggest firms. On average, their pay has risen much more than profits over the past 10 years. Pay for surveyed chief executives or managing directors at big listed or state-owned firms was up by 107 per cent, on average,between 2004 and 2014.
Profits at those companies rose by much less - an average of 59 per cent over the 10 years. Those figures are all in nominal terms, without taking inflation into account.
For all the outrage over the $4.1 million paid last year to Fonterra chief executive Theo Spierings, the dairy co-op went against the trend: its profit has risen much more than the top man's remuneration over the decade - a 146 per cent rise in pay versus a profit increase of more than 1000 per cent.
INTERACTIVE: CEO salaries and company profit/loss from 2004 to 2014
Shareholders Association chairman John Hawkins points out that profit is only one measure of value, and one which can change quite sharply from year to year.
"Profit is only one way in which investors value companies and is only one way in which CEO pay is arrived at," Hawkins says.
"The more important thing from an investor's point of view is total shareholder return and that's often also the basis on which particularly long-term incentives for at-risk pay are assessed ... other measures are also used, like the return on capital. It's a complex area and it's hard to understand, frankly."
Remuneration consultant John McGill says senior executive pay is a "very different world" to what most people are used to. "It's like comparing a very expensive vehicle with a very cheap vehicle. The rules do become a bit different."
The development of incentive or performance-based remuneration is one way in which executive pay has changed over the past 10 years.
Another trend over the decade, says McGill, is the increasing internationalisation of more jobs - and what they pay.
"If you want someone to manage an international company and you want to get the right person for the role you have to pay international rates," McGill told The Business. "To say we can get the right executive to lead an organisation like Fonterra or Fletcher Building from within New Zealand is a big call.
High performance deserves high pay and poor performance doesn't.
"Sometimes the individuals are available. They might be Kiwis who come back, like Christopher Luxon at Air New Zealand. Or we might just pick up someone who hasn't worked in this country before, as we did with Theo Spierings at Fonterra."
McGill believes the increase in popularity of incentive pay is "excellent".
However, Hawkins and the association view short-term incentive payments as a problem, especially for companies dominated by boards or shareholders from Australia, where this type of remuneration can be high.
"We worry about that because it boosts up short-term pay," Hawkins says, "but does it actually do that at the expense of the long-term health of the company?
"We are much more comfortable with long-term incentives." He says there are "quite a lot of companies" where there isn't much transparency about what executives need to do to earn incentives. "Our view as an association is that high performance deserves high pay and poor performance doesn't ... we want to see clear transparent alignment between pay and performance and if we have that, then shareholders will be happy and everyone involved with the company should be."
Rules requiring New Zealand companies to disclose only basic details of executive pay are out of step with international standards, says a remuneration expert.
In their annual reports Kiwi companies must legally reveal the number of employees earning more than $100,000 a year and what those people earn, in pay bands of $10,000.
So if a middle manager at Fonterra is earning $217,000, the dairy co-op must list one person in the $210,000 to $219,999 band in its report.
This rule doesn't mean a company must identify the individual person receiving this level of remuneration, just the number who do.
Other countries, such as Australia, require more detail.
The difference is noticeable when assessing the reports of companies listed on both the NZX and ASX.
Take, for example, the dual-listed lines company Chorus. Its 2014 report reveals that chief executive Mark Ratcliffe was paid $1,416,288 for the relevant 12-month period.
That was made up of $837,308 of fixed pay and a short-term incentive payment of $423,648, plus $103,885 of a short-term extension and non-taxable accommodation payments and $51,446 of KiwiSaver and medical insurance.
There are also details of share grants and when they vest, and the criteria on which performance incentive payments are made.
While some would call for even more disclosure than this, it is leagues ahead of the way companies such as Fonterra disclose their executive pay.
Fonterra, in keeping with New Zealand regulations, simply reveals a list of how many executives earn more than $100,000.
The Business Herald assumes - and has done so for years without complaint - that the highest-paid person on that list is Fonterra's chief executive, at present Theo Spierings.
In 2014 Fonterra disclosed that one New Zealand-based employee earned between $4.17 million and $4.18 million.
Remuneration consultant John McGill, of Strategic Pay, says New Zealand's rules concerning pay disclosure are more than 20 years old.
"Reporting requirements which date back to the rules that were set in 1993 are probably a bit out of date now in terms of international standards," McGill says.
"They're fairly basic and were quite acceptable in 1993 but would be seen to be pretty out of date today."
McGill says any change is likely to be driven by legislation rather than, for example, the stock exchange.
Shareholders Association chairman John Hawkins says there is a real discrepancy in the way companies report on pay and "that does make it quite difficult to get a clear view on it".
Hawkins says the association is doing research on the issue to find a way to make it easier to compare pay between companies.
While New Zealand's level of transparency isn't great, McGill notes that a byproduct of greater disclosure is that it can push up some executives' pay when they discover how much others are earning.
