Peter Ross and Veronica Hopkins: The bottom line on top pay

Opinion

The state of play on executive pay in New Zealand is based on the mandatory reporting requirements set out in the Companies Act 1993 and Securities Commission guidelines on remuneration.

This has commonly resulted in minimal information on executive pay being included in a company's annual report.

Businesses are required to provide data on the number of individuals paid above $100,000 a year, falling into bands of $10,000.
Typically, the notes to annual reports will provide a single table outlining these salary bands and the number of executives whose total packages fall within these bands. Generally, there is no detail presented on the elements of the package such as the base salary, benefits and performance pay received or the design behind any performance pay plans. As a result, shareholders and investors are unable to assess the alignment of executive pay with overall company performance or make fully informed investment decisions.

In contrast, Australia's publicly listed companies are required to disclose more comprehensive information about the remuneration packages of specified executives in the company.

In accordance with the Corporations Act 2001, companies are required to disclose certain elements of the remuneration packages received by directors and each of the five highest-paid officers in a remuneration section of the company's annual report.

In fact, there is an initiative gaining momentum which would raise the number of executives from five to the 10 highest-paid and/or highest-impact individuals within a given business.

The remuneration section of an Australian-listed company's annual report often contains between 10 and 15 pages outlining how the remuneration committee sets base pay levels, all cash and non-cash benefits, performance pay scheme design targets as well as the actual payouts. Extensive information is disclosed on targets within short-term and long-term incentive plans and how these have tracked vis-a-vis company performance and shareholder returns.

Often there is a historical analysis which illustrates how executive payouts have aligned in relation to overall company performance. Share plans and share option plans are also described in exquisite detail. Finally, the notes to the financial statements often contain more detail about elements of the remuneration packages for specified executives.

BHP Billiton, which is listed in Australia and Britain, devotes a number of pages to executive remuneration in its 2005 annual report. The quality and quantity of the information is high as this section contains three pages describing how remuneration is managed and structured, from whom they seek external advice and which companies they benchmark themselves against.

Four-and-a-half pages are devoted to the two executive directors, detailing the components of their remuneration - performance pay plans contracts, including share options, and superannuation provisions. Another 2 1/2 pages are devoted to describing the remuneration and performance pay packages of the top five executives. In the notes to the financial statements, there are another three pages of additional information about the shares and options awarded to specified executives.

The table illustrates how the differing levels of disclosure for executive pay required by New Zealand and Australian companies translate into the quantity of information that investors can use to evaluate potential investments.

The level of disclosure contained in listed Australian company annual reports clearly allows shareholders and potential investors to better assess the reward structure of key executives in an organisation and to evaluate its alignment with company strategy and performance.

Apart from a few exceptions such as Telecom (which also provides more extensive disclosure about executive pay on its website), New Zealand companies have not willingly supplied detailed information about top level executives' remuneration packages in their annual reports.

Aversion to the comprehensive disclosure of an individual's remuneration package is understandable in a cultural climate where the tall poppy syndrome is a common affliction. The commonly held perception of an individual's pay package being a "taboo" subject also serves to maintain the status quo in this regard.

The often quoted excuse given by companies for not disclosing executive remuneration details is the commercial sensitivity of the information. Giving out information relating to how executive remuneration is aligned with the company's strategies could possibly be sensitive. However, retrospective disclosure should not be commercially sensitive.

In addition, many New Zealand companies operate in a transtasman marketplace, competing with their Australian counterparts who are required to disclose this information and do not appear to suffer as a result. In our view, it is inevitable that New Zealand's reporting requirements in this and other areas of corporate governance will become more closely aligned with the regulations and standards applied in Australia.

To date, New Zealand has tended to follow corporate governance norms developed overseas and - in order to remain competitive in an increasingly global marketplace - New Zealand can expect more changes in this regard.

Present levels of transparency and disclosure do not inspire investor confidence. Financial commentators are perplexed at the occasional contradictions between executive pay and company performance.

In some cases, chief executives have even left organisations with huge payouts while the company has reported major profit downgrades. A recent example is evident in the $3.4 million golden handshake given to Michael Beard after Tranz Rail's demise in 2003.

Investors are increasingly intolerant of seeing rewards paid to top executives that are at odds with company performance and thus the performance of their investments. They are looking to the board to ensure all such arrangements are well justified and, if possible, reported with clarity and precision.

The responsibility of boards to remunerate fairly and responsibly has always been an important consideration for directors. In future, the effective design of executive remuneration packages and the extent to which they are linked to company performance are likely to come under increasing public scrutiny.

Directors will be expected to be knowledgeable about the best practices in executive remuneration and prepared to make all the relevant information available to shareholders, allowing them to judge for themselves. The lack of transparency in this regard has allowed boards to be less exacting in this area than in others.

However, in future, it is expected that they will be increasingly held accountable for the design and implementation of effective and fully aligned remuneration practice. With added disclosure, there will be no place to hide.

* Peter Ross and Veronica Hopkins advise businesses on senior executive and non-executive director appointments at Sheffield. Ross has a background in accounting and management and Hopkins' background is in psychology and research.