TABLED Paid to Perform

New Zealand chief executives’ salaries rose, on average, by 5.2 percent last year. Is that enough to stop them straying to more lucrative corporate pastures across the Tasman?
When senior executive recruitment company Sheffield released its annual CEO salary survey last month, managing director Ian Taylor described the rise as “encouraging” but warned that New Zealand risks losing quality talent to Australia’s more attractive reward packages, adding that it is not simply matter of the size of the salary package, but of the structure.
One of the reasons Australian CEOs pocket more compensation is that larger proportion of their salary package is gained from variable performance payments such as bonuses, incentives and share schemes.
The average proportion of “at risk” pay in New Zealand is just 14 percent; across the Tasman it is 30 percent – and that represents significant drawcard, says Sheffield’s remuneration practice manager Sherry Maier.
“This year, 86 percent of [NZ] chief executives employed by offshore owners received performance payments which resulted in total package 30 percent higher than executives on similar base salaries reporting to local owners.
“The pay difference illustrates the higher earning potential offered by variable pay structure and could be what New Zealand needs to effectively compete for quality talent in global market.”
The survey does not include Australian data but, says Maier, other information sources including the company’s recruitment arm and salary benchmarking exercises show that total CEO pay package in New Zealand can be up to 45 percent less than in Australia.
Figures here are probably skewed somewhat by structural differences between the two economies – including company and market size plus cost of living differentials. Also, local and central government leaders make up around 28 percent of the local data and they have lower prevalence of performance-based pay (24 percent compared with 59 percent in the private sector).
Such differences aside, the pay gap still looms large, says Maier.
“Some of it can be explained by cost of living [differences], by the offsetting of lifestyle benefits, by relative company size and by public-private sector mix. But the disparity is so wide the gap needs to be reduced over time or it will inhibit mobility between the two countries. We don’t just want to be training ground for Australia or see the talent drain all going in one direction.”
What percent of CEO salary should be at-risk? Maier believes anything less than 10 percent is not worth doing. “There has to be meaningful upside – an incentive plan that is five percent of base salary is not going to motivate or retain CEOs or help them focus on key organisational objectives.”
And do excessive incentives tempt CEOs to fudge company performance figures?
“That just tells me the remuneration plans were not well thought out and designed,” says Maier. “There must be checks and balances on the governance side and it is important to be thoughtful, get input from all the involved stakeholders and come up with scheme that is long term focused and links directly to key corporate objectives.”
Studies show that executives who own stock in company generate greater shareholder returns, says Maier. The correlation does not apply to stock options.
As to why there might be reluctance to boost local CEO salaries, Maier notes that data gathered by the survey is primarily quantitative but thinks that perhaps New Zealand’s traditionally egalitarian culture may be an influence.
“It’s not like the US where making more money is always good thing – here the values are different and it’s perhaps seen as little unnecessary or unfair for CEO to be earning some double-digit multiple of what an employee earns.”
Also, it’s only in the past decade that this country got serious about being globally competitive.
While it’s hard to quantify any trans-Tasman drift of CEO talent, there is anecdotal evidence that high fliers are more likely to see New Zealand as stepping stone to bigger roles across the Tasman, says Maier. “Remuneration is not the only factor in that choice, but it is factor.”