UPFRONT Are they worth it?

When Telecom decided its CEO Theresa Gattung was worth 60 percent more this year than last, board chair Roderick Deane was at pains to point out that at least half of her $2.8 million pay and bonuses package was performance based.
She’d not only reduced corporate debt by 20 percent but delivered shareholders 16.5 percent return and in so doing picked up her $1 million bonus plus an extra $440,000. This pushed her salary to level about 72 times the average wage  roughly $800,000 above any of her top-ranking colleagues in New Zealand.
But, as Deane said, this still puts her behind the heads of similar-sized corporates in the region including Qantas head Geoff Dixon on A$6.1 million, Wesfarmers’ Michael Chaney on A$6.7 million or Bluescope Steel CE Kirby Adams on A$4.4 million.
All this pales into insignificance when compared with top earners in the United States. Their total annual pay in cash and stock options hovers around US$80-$90 million. 2004 survey reveals America’s 25 top executive earners get pay packages worth, on average, more than 900 times the yearly salary of typical American worker.
And the big payouts aren’t necessarily linked to big performance. Bonuses are paid out even when the CEO in question has presided over significant shareholder losses.
Despite Gattung’s pay-for-performance package at Telecom, recent study finds that in many cases executive pay in New Zealand is not sufficiently closely linked to performance.
The New Zealand Institute for the Study of Competition and Regulation has tracked local trends in executive remuneration since the 1997 disclosure regime made this possible. After initial analysis of 476 annual reports between 1997-2002 it concludes that “CEO pay became more performance-based but the overall link remained weak”.
As institute director and professor in Victoria University’s School of Economics and Finance Glenn Boyle puts it: “Up or down, movements in shareholder wealth don’t generate very big movements up or down in CEO pay. Most changes in remuneration seem to be independent of contemporaneous performance.”
The lowest paid CEOs in 1997 produced better subsequent returns to shareholders and had much higher pay-performance sensitivity than that year’s highest paid CEOs. Over the six years of the study, it seems that mid-sized companies with chief executives paid on average $314,000 turned in the best performances, providing an average real return of 5.9 percent to shareholders. In these firms, the CEO did not sit in on remuneration discussions.
Firms whose CEO did sit on the remuneration committee and were paid an average of $613,000, returned just 2.7 percent to shareholders.
Over the period of the survey the percentage of CEOs sitting on the company’s remuneration or compensation committees climbed from 3.6 percent to 12.7 percent, which rather undermines the hands-off approach to setting CEO and senior executive salaries. Firms that have compensation committees on which the CEO doesn’t sit show higher real returns and greater pay sensitivity.
The study also looked at the percentage of CEOs who doubled as board chairs and how that related to performance. The percentage rose from six percent in 1997 to high of 16 percent in 2000 dropping back to 6.3 percent in 2002.
In terms of performance, real returns in companies where the CEO is board chair averaged minus four percent while those whose CEO is not on the board averaged 9.1 percent real return. Firms where the CEO was also board chair had the lowest shareholder returns but the highest pay-performance sensitivity.
Overall, growth in CEO pay since 1997 has exceeded inflation, growth in stockholder wealth and growth in worker earnings. The median annual growth rate is 7.1 percent and the proportion of those in the top $400,000-plus bracket has increased at the same time as those earning under $200,000 has decreased.
The median annual growth rate for board chairs is also 7.1 percent and the proportion earning over $60,000 has increased as have those in the $40,000-$60,000 bracket.

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