performance pay

A growing number of New Zealand's chief executives are not fully achieving their financial targets but are still getting most of their performance pay, according to an executive recruitment company.

The 2007 survey by Sheffield of 501 chief executives, managing directors and general managers found the proportion not fully achieving targets rose from 28 per cent in 2006 to 43 per cent in 2007.

The proportion of chief executives missing all financial targets fell from 21 per cent to 10 per cent. Nevertheless, those who missed targets were still paid three-quarters of their targeted performance pay, according to the study. Those chief executives meeting all their financial targets fell from 51 per cent to 47 per cent.

Sheffield reward manager Jarrod Moyle said the results were in line with international trends, but raised concerns that the performance system was not working well.

Mr Moyle said it should also be taken into account that the target results were derived from reports from chief executives and from not their boards.

Business New Zealand chief executive Phil O'Reilly said that as targets would have been set well before the economy started to slow last year, the financial target data was fully expected. Mr Moyle said New Zealand was moving further towards international performance pay norms. In 2007, 65 per cent of chief executives were offered payments based on achieving financial targets, up from 56 per cent in 2006.

"While it may not be the panacea, if more companies had a stronger emphasis on linking payments to performance, it could contribute to raising New Zealand's productivity," he said.

Only 18 per cent of New Zealand chief executives' total package was dependent on performance, compared with international and Australian averages of 39 per cent. Mr O'Reilly said New Zealand's adoption rate of performance payments reflected the smaller scale and ownership of companies compared with many developed countries.

He agreed that greater use of performance pay was logical, offering significant potential gains.

The survey found that base salaries of chief executives in the public sector grew 5.7 per cent. Private sector base salaries grew 4.6 per cent. The median total package for public sector chief executives was $285,000, compared with $258,000 for the private sector.

Hellaby Holdings managing director David Houldsworth's pay packet has been something like a rollercoaster in the past two years but he wouldn't have it any other way.

Houldsworth took the sharpest proportional pay cut in the Business Herald's 2005 survey of executive pay but also got the steepest rise last year. His remuneration dropped by nearly a third from $939,000 in 2004 to $632,000 in 2005 before surging almost 50 per cent last year to hit $946,000.

The dramatic swings are the result of a link between pay and company performance, with half of Houldsworth's remuneration last year being performance pay.

According to a study of 504 New Zealand bosses by human resources consultancy firm Sheffield, performance pay made up only about 14 per cent of the total salary packages of those who received it, compared with about 62 per cent of US chief executives' pay.

Houldsworth's pay packet stood out even when compared with those given by larger firms, which commonly had a 30 per cent performance-related element.

Jarrod Moyle, Sheffield reward team leader, said the pay of chief executives of larger local companies was similar to same-sized organisations in Australia, although some New Zealand managers shied away from talking about performance.

"Many New Zealanders don't want to separate themselves or put themselves ahead by becoming overtly wealthy. If you contrasted that with the United States ... more is always better and that's quite acceptable."

A Business Herald investigation of 56 of New Zealand's largest companies found that chief executives got an average pay rise of 8 per cent last year, with an average pay packet of more than $1 million.

Westpac's Ann Sherry topped the podium on $3.1 million, followed by one employee at Fonterra - probably chief executive Andrew Ferrier - on $2.9 million and then Telecom's Theresa Gattung.

However, Guinness Peat Group's New Zealand executive director Tony Gibbs' salary 2005 salary of $5.3 million - not available for last year's survey - would have put him well ahead of the pack.

This year's top six, at the time of writing, were rounded out by Fletcher Building chief executive Ralph Waters also on $2.9 million, ANZ Banking Group's Graham Hodges on $2.8 million and The Warehouse boss Ian Morrice on $2.3 million.

Linking executive remuneration to company performance sounds like a no-brainer but there is debate on how to best structure performance pay and whether it even works.

Houldsworth said he met the targets needed to get his maximum bonus last year because of Hellaby's profit performance.

Performance pay was used throughout the group, sometimes for other employees as well as the chief executive.

"Certainly we believe the best way to get performance from people is to make them responsible and remunerate them appropriately for success," Houldsworth said.

"And really that's profit-driven and no other measure. We're very much against the concept of linking it to share price and external factors.

"The share price may well increase or decrease as a function of profitability but it can also go up and down for totally extraneous factors ... therefore we don't believe that the chief executive should either benefit particularly or in fact be penalised."

Hellaby Holdings used cash rather than share options to reward performance. "It's pretty simplistic really and we think that simple works best."

Alternative schemes could average out payments over time but that could mean receiving extra pay in years the company failed to perform, Houldsworth said.

The potential for fluctuating pay was not a cause for concern, he added. "I'm happier when it's a good year but I'm very happy with the overall scheme anyway, I think it's quite appropriate."

However, Mark Harcourt, professor of strategy and human resource management at Waikato University's Management School, said more performance pay did not necessarily lead to better performance.

"If you were giving chief executives an extra 20 grand and some years they got it and some years they didn't they might complain and bitch about that far more and react negatively to it than if they never got it in the first place."

Some pay structures could actually attract the wrong person for the job.

"Options can induce executives to act more conservatively, ironically, because so much is riding on how well the share price does. Executives in some cases, particularly in a rising market, can choose more conservative but more certain investment returns," Harcourt said.

"The shareholders may prefer a higher average return, risk is less of an issue with them because they've diversified their portfolio into potentially several stocks and assets."

In more extreme cases stock options could encourage fraud.

"It's just been too tempting ... They [executives] cook the books to make the firm look more profitable or at least look like profit is increasing."

Fraudulent action could boost the share price and increase the payback on stock options.

But most people faced with a regular pay packet were generally trustworthy and would not shirk responsibilities, Harcourt said.

Stewardship theory explained why executives receiving a more basic pay packet still performed.

"[It] emphasises goodwill and general willingness and motivation ... to do the right thing, to do a good job and to take the long-term interests of the firm or the organisation into account in making decisions."

A failure to take fairness into consideration when setting workers' pay could also hurt the business.

The Business Herald survey found the average chief executive remuneration for New Zealand's largest companies was more than $1 million last year - more than 27 times the average pre-tax pay of wage and salaried employees of about $38,500.

"If anything it's probably more relevant here [in New Zealand] because this is a society that's not keen on status differences," Harcourt said. "This is a society where the tall poppy syndrome predominates.'

But Bruce Sheppard, Shareholders Association chairman, said New Zealand needed to get over that.

"We need to have an aspiration society, where we aspire to do better and we aspire to create great businesses that generate wealth for all stakeholders," Sheppard said.

Sheppard wanted more uncapped performance pay that was robustly structured and aligned with long-term creation of shareholder wealth.

However, company boards could over-complicate the process, he said.

"If the person you are paying it to doesn't understand how it works and what the performance hurdles are and what he has to do ... and if what he has to do isn't measurable and capable of being reported real time, guess what? It doesn't work."

Sheppard wants performance rewards to be aligned across management teams and spread throughout organisations.

"How do you get a team of horses to all run in the same direction? You put the same bag of hay in front of them."

The association also wanted to see increased disclosure of executive pay.

The Business Herald investigation found 13 companies did not specifically disclose the pay of the chief executive other than to list the number of employees in remuneration bands above $100,000.

"The reason we need it is if you know how your executives are being paid you know what the business' strategy is," Sheppard said.

The use of share options as an incentive was anathema to the association, he added.

"[For example] we want to give you [a] $100,000 incentive so we're going to give you $1 million in shares you don't have to pay for for a period of time and based on some bullshit calculation that equals $100,000 a year of value," Sheppard said.

Sheffield's Moyle said performance payments in New Zealand were mainly paid annually in cash but he didn't rule out the use of share options.

"[If] one of the primary objectives of the organisation is to improve shareholder value then shares or share options do have their place," he said.

Greater disclosure in annual reports would go a long way to changing the nature of executive pay.

Listed Australian firms had to provide a detailed breakdown of the top five executives, including their names, position and pay.

The Australian system, which was more the international norm, provided greater accountability and information to shareholders.

"It's a cultural issue that we don't like to discuss what we're being paid."

New Zealand chief executives are trailing behind other countries when it comes to performance pay because they want the safe option of a guaranteed salary, according to a study.

Human resources firm Sheffield looked at data on 504 chief executives, managing directors and general managers nationwide.

It said 56 per cent of chief executives received performance-based pay last year, up slightly on the previous year but down from a high of 69 per cent in 2003.

Jarrod Moyle, Sheffield reward team leader, said performance-related elements accounted for about 14 per cent of the total salary package of those who received it.

"The incidence of performance pay was steadily increasing up until 2003 ... but from there it has declined to its current level of 56 per cent," Moyle said.

In the US, pay packets included a 62 per cent performance pay element, while in the UK and Australia it was 35 per cent and 30 per cent respectively.

"On the whole, New Zealanders are not as motivated by financial gain as some of our colleagues overseas," Moyle said.  "In New Zealand, many Kiwis will work hard to get to a certain level of net worth and are then content to simply maintain this lifestyle.  "While we don't want to emulate the corporate greed we sometimes see offshore, we do need a greater drive among our leaders to achieve business success," he said.

Chief executives in Auckland were paid a median total salary of $297,670 compared to Wellington with $285,000.

The median total salary for chief executives in the public sector was $255,000 compared to $248,291 in the private sector.

Executives

* Median salary for Auckland: $297,670.
* Median salary for Wellington: $285,000.
* 9 per cent of CEOs are women.
* 56 per cent of CEOs get performance pay.