Chief executives rake in the cash

Contact Energy knew it was buying a fight when it proposed an almost five-fold increase in chairman Phil Pryke's pay to $390,742 and similar increases for four of his colleagues.

In its notice to last year's annual meeting explaining the rise, the energy giant was attuned to the potential controversy: "The question of remuneration of directors is inevitably a thorny topic and one that the board would acknowledge has not always been well handled in the past.

"This year, we have tried to approach these issues with considerable care and consultation."

Pryke's salary rise, according to a Business Herald survey of New Zealand's largest companies, is the largest percentage increase received by any director.

Contact said it was bringing executive pay in line with international trends, compensating directors for closing off retirement benefits and aligning directors interests with shareholders'.

No matter, the rise is still enough to make most New Zealand workers choke on their hastily grabbed lunch-break pies: the average income rose 2.6 per cent for the year to June 2004 to $29,000.

The Business Herald survey, which looked at the 2003 and 2004 annual reports of 38 firms, found:

* Including cash payments, benefits and bonuses, Guinness Peat Group executive Tony Gibbs was the highest paid, pocketing £1,396,188 ($3,763,310) for 2003 (2004 data not available). He was followed by Telecom chief executive Theresa Gattung on $2,829,130, and Westpac executive Ann Sherry on A$2,433,651 ($2,646,423). Fonterra chief executive Andrew Ferrier's pay was not disclosed but he is expected to get around $2 million if he meets his targets.

* Based on a sample of the 25 companies providing accessible data for both years, chief executives on average enjoyed a 25 per cent increase in their pay in 2004. This compares with a 25 per cent rise in the benchmark NZSX-50 over the last year.

* Over the same period and adjusting for an extreme result at Sky Network Television, average sales increased 5.3 per cent and surplus increased by around 5 per cent, just ahead of the increase in New Zealand's gross domestic product.

Few disagree that Contact's reference to overseas trends is valid, as executives can more easily hawk their talents abroad than the average worker.

John McGill, a senior consultant for remuneration advisers Strategic Pay, said there was still a gap between executive pay in New Zealand and that on offer in developed economies abroad.

Although difficult to compare individual deals, he said Australian executives on average were paid 20 per cent more than here.

New Zealand Shareholders Association chairman Bruce Sheppard said the absolute level of executive pay did not matter so much as how well it was disclosed and whether the scheme could be understood by shareholders.

The survey showed Telecom and Westpac as standout performers for disclosure of director remuneration.

The telecoms group clearly states Gattung's pay includes $385,299 from a performance option scheme and the fact that she was issued another 500,000 options with an exercise price of $5.01. She is also entitled to another one million over the coming couple of years.

Westpac provides details on the performance target for chief executive officer David Morgan. It also breaks down the pay of its New Zealand boss, Ann Sherry, as A$550,000 base pay, A$600,000 short-term incentive, A$234,664 non-monetary benefits, A$127,400 superannuation, A$527,293 share options and performance share rights of A$394,294.

In contrast, almost half the companies surveyed by the Herald did not declare by name the remuneration of senior executives.

Many companies prefer to group together a basket of performance payments and benefits without detailing the calculation basis or any future potential. Others just state a total remuneration figure or merely list the number of employees at various remuneration levels.

Sheppard says disclosure rules are ripe for change. Although boards are more in line with corporate governance than ever before, firms are resisting a more comprehensive disclosure of remuneration packages.

He advocates a regime similar to the UK where corporate governance codes require directors to prepare remuneration reports that are clear and transparent.

UK companies must disclose salary, bonuses, expenses, performance conditions, share options and long-term incentive schemes.

"If you look at British Telecom, they have more information in their annual report on executive remuneration than they do on corporate governance. They're obliged to," Sheppard says.

"The best mirror to a company's strategy is how they pay the people that have to carry it into effect."

Sheppard says most of the performance-based packages that have been developed are flawed because they link rewards too closely to share-price performance. He is a vehement critic of schemes relying on share options, which allow executives to buy shares at a fixed price.

Although shareholders have an obvious interest in the share price in relation to executive pay it is only a relative concept.

Sheppard says share value is driven by many forces and does not respond efficiently enough to effectively measure executive performance.

Company earnings, on the other hand, are under the control of the executive officer, affect long-term share price and are a better basis for judging performance. "Pay them in cash, reserve a portion of that cash and require them to buy shares. If they buy shares, they'll become owners and they'll behave like owners."

Sheppard says forcing executives to hold on to these shares for a period of time will remove any temptation to "crank" short-term results.

"In a perfect world what I want is a 5 per cent total remuneration base and an unlimited potential to make a fortune for delivering performance. The problem is you've got to define what that performance is, and define short and long term."

McGill says options schemes will not be abandoned. "It's what the shareholders are looking for. Their investment is in terms of shares so the share price is important to them. It seems perverse that you will not have some link with your senior executives for that particular indicator."

McGill says pay linked to company performance attracts good executives and encourages them to deliver success.

He highlights the impact new leadership had on Air New Zealand, which has recovered from the 2001 collapse of its Australian arm Ansett.

"Suddenly within a few months of Ralph Norris being appointed they had new strategies and new direction," he says.

"They turned deficit into surplus and the operation is given a lot more than a fighting chance now, whereas a couple of years ago people were saying: 'What do we do with it? How much money do we have to pump into it?"'

Last year, Norris pocketed $1,250,000, including a $250,000 incentive payment. Meanwhile, the rest of the airline's board also got hefty pay rises, reversing a pay cut introduced during the Ansett crisis.

McGill says there is an increasing gap between executive pay and that of other employees but says international comparisons cannot be used for all jobs.

"If secretarial roles start comparing themselves with North America or Australia my first reaction would be they've lost the plot completely."

Remuneration specialist Kevin McBride says employers have to balance the need to compete internationally in attracting the best managers, with the relatively small size of the economy.

He also worries many executives get paid bonuses even though they do not achieve their targets.

A 2004 McBride HR survey showed although nearly 70 per cent of companies operated performance schemes for executive managers, almost half paid out to senior managers who achieved only 80 per cent of their target.

"If you've got performance payments cutting in at achievement of 80 per cent of your criteria it raises the question of why would people want to put in the extra effort needed to get the other 20 per cent."

McBride also says the gap between senior executive pay and those reporting to them has widened. But he adds that rather than a lack of adjustment in employees pay the issue is a lack of adjustment in their pay scale.

"Any remuneration structure has got to be based on the premise that you're paid a fair return for the work done and that follows all the way through to entry-level. "People who contribute beyond what that requirement is should get that recognised in some way."

New Zealand Council of Trade Unions president Ross Wilson agrees: "Executives are remunerating themselves more than they are sharing the profits with their employees.

"You certainly do need to have a performance criteria for senior management that needs to be focused on what is vital for the company, as well as just easily achievable short-term criteria that have been drafted by senior management for their own benefit."