Editorial: Executives should share pain

Opinion

Share options have been the subject of much bad publicity in the past few years. They were widely abused in the United States during the technology bonanza, and are often criticised for linking rewards for executives to as narrow a measure of company performance as the share price. Yet there remains considerable attraction in the idea that executives are more likely to make better commercial judgments if they have some of their own money on the line. And that they should share the pain of the bad decisions they make and any slump in their company's performance.

Theresa Gattung, the Telecom chief executive, has the small matter of $2.4 million on the line. Mostly this comprises share options, which were valued at $2.1 million when they were issued but are almost certainly worthless today. These gave her the right to buy shares at between $4.70 and $6.77. Creating any value from them now is unlikely given that Telecom's share price has plunged to around the $4 mark, a 13-year low, after the Government's decision to unbundle the local loop.

Ms Gattung is not unusual in having her salary tied this way. A survey last year by consultancy Sheffield found that six out of 10 New Zealand executives had a portion of their remuneration linked to company performance. But the fact that as much as 60 per cent of her salary package is performance-related is rare. After 1994, Telecom was an ardent proponent of share options, a position it has stepped back from over the past couple of years. Now, the market trauma associated with the unbundling decision, and its dramatic impact on the remuneration of Ms Gattung and others of its top executives, has triggered another major rethink.

Telecom spokesman John Goulter has not ruled out some variations to the options schemes in the future but there is no suggestion that Telecom will adjust the present scheme so its executives can recoup their losses to date.

Already, however, some analysts are suggesting that losses of the sort suffered by Ms Gattung and the other top executives are a huge disincentive for staying with Telecom.

It would be disturbing if that fear shaped any new executive remuneration formula and if, as has happened overseas, new packages were to include larger base salaries and much reduced at-risk components. Performance incentives in some shape or form, albeit probably with a reduced role for options, should continue to figure strongly. It should not be forgotten that the strategies that have produced such anguish for Telecom shareholders were driven by Ms Gattung, her senior executives, and the company's board. She would have been rewarded richly if her policies had succeeded. Is it not reasonable that she suffers with shareholders when they fail grievously and $3 billion is wiped off Telecom's market value?

New Zealand's leading, and most successful, executives should be well rewarded. In a global marketplace, that is the most obvious means of retaining their services. But Telecom should not be cosseting executives who have not only grossly miscalculated Government policy but overseen the disengagement of the company from the populace. Their discomfort is no real reason to reduce the at-risk component of their remuneration. If they, or other executives, feel they cannot live with packages that include significant performance hurdles, so be it.