REMUNERATION Pay for Talent and for Performance

Businesses need first to attract and then retain the best people possible, says Sherry Maier, Sheffield’s new remuneration practice manager. If companies don’t pay (for senior executives) competitively, both in terms of amount and package structure, they may not attract the right executives. And while this is generally appreciated by the marketplace, businesses seem slow to recognise that performance- based remuneration is key element in the process of both attracting the best people and their achieving the best business outcomes, she says. “Proportionally, New Zealand has one of the lowest levels of at-risk pay in the world.”
Remuneration for talented chief executives is not just about absolute dollars but about “how those dollars are structured”, she says. I believe that well designed performance pay programme is one of the most powerful corporate tools available to any board or business.”
Without such programmes ,companies may miss opportunities to really focus executive skills and energy.
Why not use every tool available to improve business results?
A couple of ancillary issues tie into this however. “There is little evidence, for instance, that typical share or share option programmes, deliver enhanced corporate performance. There is some evidence of an inverse correlation between company results and pure options schemes. Too often, options prices reflect many market variables outside the executive’s control,” says Maier. “But where positive correlation with corporate performance does exist, meaningful, straightforward stock ownership is involved.”
“If you are an executive of company who owns shares, you then think like shareholder and your objectives and goals align with adding value to those holdings over time.
“The power of at-risk pay related to performance or corporate goals is often very real. At one financial services firm with operations in New Zealand, the incentive pay programme currently hinges solely on growth in international revenues. Can you imagine how much attention is paid to those numbers?” she asks.
“Incentive pay, if well designed, can unquestionably focus executive attention on key issues facing the organisation.
“Identifying single goal, or several line of sight goals that people can affect, or at least influence, unleashes energy, mobilises resources and focuses people on core corporate objectives.”
“Performance pay is under-utilised in New Zealand – both in terms of the incidence, and the dollars attached. In my opinion, if there is less than 10 percent of the base pay at stake, it may not be worth having the programme. That does not suggest guaranteeing payout level, rather it means providing an opportunity of at least 10 percent. Are you really going to change behaviour or create focus for five percent upside? Again, if we’re going to do it, let’s make it meaningful.
“Many of the performance pay programmes out there today are subjective and discretionary. The opportunity to align with key business outcomes and drive results is missed,” Maier adds.
International research by Towers Perrin shows the insignificance of performance-based remuneration of executives in New Zealand. For instance, 75 percent of CEO’s remuneration package is delivered in fixed, base salary. Only 15 percent of the package is variable, and 10 percent in benefits. By contrast, Australian CEOs obtain just 45 percent of their total remuneration in base pay. Our executive pay structures equate more with China’s than with other Western economies.
In terms of total remuneration, New Zealand executives have the lowest proportion in variable, performance- based pay. “Relying solely on fixed salaries, organisations are paying for attendance – not performance,” says Maier. “And if we consider how executives are being paid in Australia, New Zealand needs to ask how well we will compete for good people. There is simply so much more upside for individuals if, and only if, they achieve results, and in their long term opportunity to create personal wealth.
“Perhaps New Zealand is fundamentally risk averse culture. One concern with that is the potential for too many senior managers to become paid administrators. When you look at international remuneration surveys, they do tend to create the impression that Kiwi executives are risk averse.
“I believe results oriented pay packages can help attract the right people. Without them, the risk is that organisations will attract conservative managers who are uncomfortable with taking risks, uncomfortable with new ideas and so on.
“Sheffield always recommends having meaningful, well defined performance-based remuneration package at CEO level. It’s sound business practice,” says Maier. “But we have seen organisations opt out of existing plans because they are uncomfortable with its structure or administration. It is ‘easier’ to simply pay base salary with benefits.
“With pay effectively guaranteed, companies are paying for attendance rather than performance and telling the individual that all they need do is show up every day, fulfil the basic responsibilities and ‘play safe’. Isn’t that the message?” she asks.
In the meantime, the most important job board has is to recruit the right chief executive and then to “create the environment where that person can be successful and do all the things needed to succeed in rapidly changing marketplace. They have to be empowered to maximise all the talent, skills, whatever it is they have. Part of that is having an at-risk pay programme – an upside for them,” Maier adds.
In Maier’s opinion shareholder advocate Bruce Shepherd effectively articulates what boards must do to ensure executive pay should be tied in to measurable, transparent, clear and understandable corporate goals. “I think he has the right idea. Whether it is listed, unlisted private or public company, the same principles apply,” she says.
Organisational position and strategic priorities are important when it comes to deciding what key elements of performance should be measured or used to structure relevant remuneration package. But as general statement revenue growth is an important measure. “You can do all the cost cutting you want but if CEOs are not growing the top line and growing the business they are not adding value. But there need to be few other key goals – return on investment (ROI) or even return on assets (ROA) for instance – whatever drivers in the business are really adding value – it might be market share, or customer satisfaction.” But the composition depends on the strategic goals and current priorities, she adds. “Two or three clearly outlined and articulated reporters are ideal.
“Keep it simple and transparent and not subjective. And if company’s fortunes are heading south, then the CEO and senior executives should not be eligible for payouts.” In other words, individual executive rewards and the fortunes of the organisation need to be headed in the same direction. “They do not need to be exactly parallel but directionally they should be tracking pretty closely.”
According to Maier, Sheffield is working to help organisations be more successful. Showing them why and how performance based remuneration programmes can contribute to that is therefore part of the consultancy’s role. “We want our clients to obtain successful results.”
Maier accepts that implementing and managing performance based remuneration programmes is not easy. “And you don’t always get it perfectly right. That’s why they have to be managed and constantly reviewed,” she adds. “You don’t just put it in and leave it there for ever. The world is moving way too fast for that. It can be hard work and it takes clear thinking. It forces organisations to clear about business objectives and creates lot of discussion at executive team level that is quite healthy.”
If boards and senior executives are not sure about where the organisation is going then, “they are probably not going to get there,” she offers. “Or we are n