UPFRONT Why don’t we pay for performance?

Australian execs get nearly twice as much while American CEOs earn nearly four times that of their Kiwi colleagues – it seems local CEOs are seriously lagging global trends when it comes to performance pay.
In releasing its 2006 CEO Survey last month, Sheffield described the reducing level of performance pay in New Zealand as alarming.
“It sets New Zealand-based executives poles apart from the rest of the major economies internationally. Around the globe the incidence and proportional amounts of performance pay are growing,” says Sheffield reward practice manager Sherry Maier.
Here, they’re shrinking. Two years ago nearly 70 percent of chief executives received some form of performance-based pay. That number has now dwindled to 54 percent and the amount of discretionary pay averages just 16 percent compared to 30 percent in Australia and 62 percent in the United States.
“The only country that registers lower proportion of performance pay than New Zealand is India with 14 percent,” says Maier.
New Zealand executives also receive much smaller proportion of their remuneration in the form of benefits – just seven percent compared to the US and Canada on 11 percent, Australia on 19 percent and India on massive 41 percent.
Why the discretionary pay gap?
Possibly the country’s deteriorating business activity means fewer CEOs are achieving their performance targets – though this shouldn’t show up till next year, says Maier. It could also point to lack of faith in performance-based reward systems, she suggests.
Companies could be avoiding them either because they’ve been poorly managed or because recent high-profile bonus and share option scandals have given them bad name.
While smaller part of New Zealand CEO salaries is “at risk”, the result is shrinkage in the overall package, says Maier.
“The lack of performance target severely restricts the earning capacity of CEOs. Not only that, but they are likely to perform better if their salary is closely aligned to how well the company is doing. Well-designed, properly aligned performance pay systems are invaluable tools for driving high performance cultures.”
The good news is that the base salary for local CEOs rose 5.8 percent in 2005 to median of $170,000 – the largest movement in base salary since 1990.
Aucklanders are ahead in the earnings stakes with an average of $290,000 compared with $265,000 in Wellington and $225,000 in Christchurch. Those heading publicly listed companies earn nearly twice as much as their counterparts in privately owned companies.
There’s also widening gap between the pay of executives reporting in New Zealand compared to those who report offshore. Industries with the highest percentage of performance-based pay include hospitality/entertainment, the primary sector and retail/wholesale.
There are no gender comparisons primarily because the proportion of female CEOs in the survey is too small (nine percent) to be statistically valid.
Sheffield’s CEO Survey includes data from 544 CEOs, managing directors and general managers in range of industry sectors.

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