Performance-based pay for executives works

Executive pay is a hot topic this year. The excesses of a few Wall Street bankers have hardened public opinion on the issue and even brought calls for governments to legislate what a company can pay its staff.

But New Zealand chief executives don't live in the same world as the finance industry tsars that have contributed to the downfall of the US economy.

For the most part they preside over far more down-to-earth businesses. They manage companies that are relatively straightforward with successes and failures that can be measured every results season.

The purpose of the annual Business Herald chief executive salary survey is not to indulge indignation about higher salaries that chief executives earn. The point is to ensure transparency and encourage accountability.

If the performance of a company is out of sync with the remuneration of the chief executive then shareholders have a right to be concerned - ultimately they are the employers.

The information they need to make those kinds of judgments should be easy to find and interpret.

In New Zealand that is not always the case.

Our survey collates the material that is provided to shareholders at the back of a listed company's annual report.

That information is far less detailed than that which is disclosed in the United States or Australia.

In New Zealand it is not compulsory to provide names and shareholders are often left to second guess whether the top paid employee is in fact the chief executive.

Detail about how much of a pay package is base salary and how much is bonuses - disclosed in Australia and the US - is often absent here.

It is probable that the slowing economy and falling corporate returns have curbed the bonuses and performance-related component of local chief executives' pay.

The rate of increase has dropped sharply and is likely to drop further. The worst of the credit crunch only started to bite into corporate earnings at the tail end of the last financial year.

Performance-based pay - when it is administered properly - has the advantage of moving executive salaries quickly and dramatically to reflect economic conditions.

Guinness Peat Group is an example of one company happy to tie a large chunk of its pay to performance. For that reason New Zealand executive director Tony Gibbs sees his remuneration fluctuate dramatically from year to year. Some years he is the best paid man in the country, some years (like this one) he is further down the list.

In the US it is common for up to 60 per cent of a remuneration package to be linked to performance. In New Zealand that is closer to 15 per cent.

Certainly, the collapse in the US has thrown up examples such as that of failed insurer AIG, where commitments were made to pay bonuses that now look obscene. Those stories have made the headlines.

Meanwhile, across the board US executive pay rates are correcting quickly.

The New York Times last week ran its survey of the top 500 US chief executives' pay. The median pay package was about US$8.4 million ($14.4 million) and had dropped 9.4 per cent since 2007. The median level of cash bonus dropped by 21 per cent.

Outside of the investment banking sector it seems there is something about the US system that works.