Promote from within and save

Fonterra chief executive Andrew Ferrier. Photo / Dean Purcell

A move towards more internal promotions of senior management staff could improve the performance of companies and keep a lid on executive pay, says the Shareholders' Association.

The Business Herald's latest executive pay survey found the average pay rise received by the bosses of 47 listed and State-owned firms, as well as dairy co-op Fonterra, was 14 per cent in 2010 financial year.

For all New Zealanders, the average wage increase was 1.7 per cent in 2010, Statistics NZ figures show.

Some of the highest-paid chief executives in this country are "imports" - brought into their companies from overseas - such as Fonterra's Andrew Ferrier, Telecom's Paul Reynolds and The Warehouse's Ian Morrice.

In 2010 Ferrier and Reynolds were paid $5.1 million each, while Morrice received $2.8 million, down from $3.8 million in 2009.

"Most successful companies promote from within," said Shareholders' Association corporate liaison Des Hunt.

"If you look at [the listed] companies in New Zealand that haven't promoted from within, you'll notice the pay to get them into the company is substantially higher but performance is actually lower."

Hunt's argument is supported by research out of the United States.

Global management consultancy A.T. Kearney and the Kelley School of Business at Indiana University studied S&P 500 non-financial firms between 1988 and 2007.

The research found 36 companies that exclusively sourced new chief executives from within their own ranks - including McDonald's, DuPont, Colgate-Palmolive, Nike and Microsoft - consistently outperformed other corporations in return on assets, equity and investment, revenue and earnings growth, earnings per share growth and share price appreciation.

The cost of placing an external candidate into a chief executive role was 65 per cent higher, on average, than the cost of promoting an internal candidate, the study also found.

Shareholders' Association chairman John Hawkins said bringing an outsider into a chief executive role could be disruptive as well as expensive, as existing senior management staff could become upset about being overlooked for promotion.

Hunt said The Warehouse made an excellent decision in promoting Mark Powell - a former coal miner who has held senior roles at the group since 2002 - into the chief executive role this year.

Powell becomes the new boss of the retail group today.

John McGill, chairman of remuneration consultants Strategic Pay, said boards needed to carefully assess the situation when appointing a new chief executive.

"The appointment of the chief executive is so critical to the organisation's success," he said.

"If there's people internally and they're right for the job that's excellent but the key criteria is whether the person can do things the organisation needs them to do."