KEY POINTS:
Setting a chief executive's pay packet isn't rocket science, although getting agreement early on can help avoid a bun fight later.
Pumpkin Patch executive chairman Greg Muir says the best time to get it right is the first time.
"Because if you then try and do it every year as you're going along, I think boards tend to get a bit sick of chief executives constantly putting their hand up."
Boards often hired a remuneration specialist to provide a salary survey which considered elements including the industry, country, type of role, staff numbers and turnover. The board sifted through that and then tried to figure out where they should place their chief executive on that continuum, Muir said. "For example, a relatively new chief executive might come in at 90 per cent of full pay and a very experienced one might be 120 per cent."
The strength of negotiations between a board and its chief executive could vary dramatically.
"There'll be some organisations where they'll receive the information and it's essentially thrown in the bottom drawer because it then becomes a bargaining process between the board and the chief executive.
"There are others where the board has a fairly firm view on these things and they present it as a fait accompli to the chief executive."
The market for senior executives was quite well understood and it was unusual for negotiations to start without both parties having a reasonably good idea of the value of a position.
But nailing down a new chief executive could still take weeks and aggressive negotiation could be unhelpful for the longer-term relationship, Muir said. A solution had to be reached that worked for both parties.
"If you can't do that then probably either you're in the wrong organisation or the organisation's got the wrong person."
Auckland International Airport chairman John Maasland said two of the most important tasks for a board were to appoint a chief executive and govern their pay and conditions.
The right skills set depended on more than qualifications and capabilities, including the ability to lead a team and how the chief executive related to the chairman, "because the chairman-chief executive nexus is a very important one in any company".
Negotiations with a potential chief executive were usually frank and open, with a couple of issues that require a bit of "toing and froing", Maasland said.
"One would tend to find that when you got down to the end where you're dealing with a final candidate then most of the major issues have been agreed and resolved."
Another chairman, who asked not to be named, said some negotiations could be contentious.
"I haven't been in a situation where it's been pistols drawn, if you like, but chief executives see themselves with a short shelf life, so they want to be paid what they believe they're valued.
"On the other side, the boards have got to ensure the payment to the chief executive is fair, bearing in mind that shareholders will have an interest in what the chief executive's going to be paid."
A board could actually get the recruitment agent to undertake the negotiations, within guidance, for the appointment of a new chief executive.
"That preserves the relationship that you might be wanting to have going forward."
Pumpkin Patch's Muir said remuneration packages were often a combination of basic pay plus incentives split between short-term cash, based on the previous year, and long- term share options based on performance over three to five years. Extra benefits could include elements such as a company car.
Nicki Crauford, chief executive of the Institute of Directors, said authorising a third party to undertake negotiations was highly unusual.
"The board employs the CEO, the board effectively is entirely responsible for what goes on in a company, the board delegates its authority to management [and] to the CEO," Crauford said.
"Of course, if they wish to they can also delegate the negotiation of that employment agreement to a third party but it's still their responsibility."
