Mike Williams: CEO salaries excessive

Mike Williams

THE revelation that Theo Spierings, the CEO of Fonterra, is paid more than $4million a year and that he'd managed to score an increase of $600,000-plus in the most recent reporting period must have been a bitter pill for the farmer/owners of the co-operative.

Their hugely reduced income is driven largely by the international price of milk powder and it is reported that only those with no debt at all (an unusual situation) will have a chance of making anything approaching a profit this year.

The hundreds of Fonterra staff who will lose their jobs in the restructuring announced by the same CEO will be similarly irked to realise that while they are job hunting their boss is pulling down a minimum of $1600 per hour.

The CEO's offer of a "pay freeze" will be cold comfort here and may suggest that his contract has some sort of ratchet clause.

These are particularly noxious conditions of employment and mean that pay can increase to reflect a good year, but not drop in response to a bad one.

Though we are told that the huge wage increase is related to the co-operative's performance in the previous year, there must be less-inflammatory ways of rewarding performance in a notoriously cyclical commodity-driven industry.

Federated Farmers leader Andrew Hoggard summed up the dilemma facing big companies well.

"The big question I've got is, 'How [is] the performance is actually measured'?

"In both seasons we've seen little dividend growth. I would assume his performance would be based around the dividend and the performance of Fonterra in terms of its dividend because obviously there's not a huge degree he can do to impact on global milk prices.

"Often when you hear about these big salaries, we've got to remember Fonterra's a bloody big company and you don't just pay somebody $100k to run a company like that. You've got to meet the market."

A better indicator of the performance of the Fonterra CEO might well be the organisation's share price, which reached $8 in March 2013, but was down to $5.60 in September this year, but Hoggard's point about meeting the market is often what drives these clearly excessive salaries.

I have some experience of this phenomenon as I was involved in interviewing and employing CEOs for three large state-owned or controlled enterprises in years past.

The process seems inevitably to involve a consultancy, The Hay Group, which consults its global database, looks at the size and complexity of the employing organisation and comes up with a range of remuneration.

In one memorable case, the directors of the SOE looking for a new chief executive rejected Hay's advice, offered considerably less than what was recommended and employed a new CEO who turned out to be an inspired and innovative leader.

Very often there is an assumption that huge pay packets are equally huge motivators of performance, when there are often many other drivers for successful business leaders. It is worth quoting the retiring global CEO of Royal Dutch Shell who conceded: "If I had been paid 50 per cent more, I would not have done it better. If I had been paid 50 per cent less, then I would not have done it worse."

One CEO who was employed on my watch took a significant pay cut to come to New Zealand as he'd identified it as the place where he wanted his kids to grow up and another reduced his salary ambitions by a third during tough negotiations.

Just as the Fonterra CEO's salary became a political issue, at least among the beleaguered dairy farming community, executive pay in the electricity industry has the likelihood of becoming a much broader issue, especially among the less well off.

Consumer tells us that "since 2000, electricity prices have risen by 46 per cent in real terms and the most significant impact has been on low-income households which now have to spend a larger proportion of their income to keep the lights on. Last year, the lowest-income households spent 10 per cent of their income on energy while the highest-income households spent 1 per cent."

Given that New Zealand's overall electricity demand is flat or falling and that most of our generation is hydro, geothermal or wind (no fuel cost) these increases are inexplicable unless the privatisation of Genesis, Meridian and Mighty River Power and incentive-driven executive remuneration is behind this apparently voracious thirst for profit.

Next time you get a power bill, you might reflect on the fact you are funding at least one $1 million-plus salary and start looking at insulation, heat pumps, solar hot water or even solar power.

Perhaps that's one good outcome of out-of-control CEO salaries. It may contribute, however obliquely, to reducing global warming and climate change.

-Mike Williams grew up in Hawke's Bay. He is chief executive of the NZ Howard League and a former president of the Labour Party. He is a political commentator and can be heard on Radio NZ's Nine to Noon programme, at 11am Mondays, and Sean Plunket's RadioLive show, 11am, Fridays. All opinions in this column are his and not those of the newspaper.