Des Hunt: Executive pay out of control

Opinion

Management consultant Gregg Brogan last year accused "cowardly" boards of not standing up to pay demands of chief executives.

He said executive pay systems had risen far in excess of performance through the overuse of market-linked methodologies.

The Shareholders Association has been saying this for some time - about chief executive packages as well as the method with which director fees are being set.

Brogan says the solution does not lie with more regulations but in boards standing up to chief executives. As we all know when attending annual meetings we are told by the chairman they have received expert advice on what the directors and chief executive should be paid.

What they do not tell the shareholders is the "mathematical idiocy" of the peer-ranked method, in which a board is advised the CEO should be better paid than the "median" salary in that sector.

We often hear from boards that they have to compete globally for talent, thus justifying far higher salaries. What they do not mention is that performance measures are linked to local peers, which often have been set with softer performance hurdles.

As Brogan stated in his article in the Australian, "basically it's nonsense [but] executives and CEOs didn't question it because they didn't want the gravy train to stop".

Research indicates few listed stocks have performed in line with executive pay increases.

Brogan says Qantas' top five executives enjoyed a 200 per cent pay rise between 2002 and 2008, but the airline's return on capital employed (roce) - the most generous measure - grew only 84 per cent.

The trends were the same with the ANZ Bank (pay up 65 per cent, roce up 15 per cent), Land Lease (250 per cent, roce up 100 per cent) and CSR (100 per cent, roce 10 per cent) - these were not the worst performers.

The Australian superannuation funds are demanding law changes to force boards of listed companies to explain big increases in executive salaries and cash bonuses and put a dollar figure on potential golden parachute payments for senior managers.

There are calls in Australia for companies to disclose the names of their remuneration consultants. What annoys me is that a number of local consultants are using the Australian data to push up remuneration packages for chief executives in New Zealand when it is obvious from the feedback that the investment industry is not happy with what is occurring in the marketplace.

The same could be said when recommending director fees. The benchmark should be New Zealand for the vast majority of companies. In New Zealand, we do have a number of companies whose performance falls way below that of the chief executive's and directors' increases.

Brogan said he found his recommendations went down poorly with the remuneration committees. He now specialises in performance-based schemes for lower to middle management and says chief executives make no bones about imposing rigid performance criteria at the lower levels.

Data supplied by Strategic Pay showed medium fixed pay of chief executives increased 34.6 per cent from 2001, compared with a 26.1 per cent rise for middle management.

The Association has urged boards to adopt performance indicators, especially those that can be easily measured, and then religiously adhere to them. To pay performance bonuses when targets have not been achieved is unacceptable. In setting remuneration packages, I would like to see short-term bonuses (12 months) that are no more than 30 per cent of the total basic pay. Long-term bonuses should not be paid out until at least three years.

The issues involving chief executives' pay are not that different to those encountered when setting director fees.

All too often we are seeing recommendations for the doubling of director fees. I would like to see director fees reviewed based on the performance of the company and what it plans to achieve in the coming say two years, rather than comparing them with a similar size organisation which may be under-achieving.

At future annual meetings the shareholders would then be voting on the new fees based on some solid facts rather than what is being now being recommended by the board as a result of a report from a consultant.

As Sydney Morning Herald columnist Michael West said: It's high time the notion of a paid remuneration consultant as "independent expert" is debunked for good.

The NZSA supports increasing directors' fees for those companies which produce regular, solid results.

* Des Hunt is corporate liaison director for the Shareholders Association.