Getting CEO pay right in the age of transparency

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The transparency around CEO pay packages and related activities has seen the media come out in force in the past year. Major corporates including Fonterra, Fletcher Building and ANZ have all recently had intense scrutiny on the level and determination of their CEO’s pay.

Interestingly, discussions around all three have referenced incentive pay levels and processes around them. While social and other media are often very grudging in recognition of any of the achievements of the individuals – David Hisco was for example a very successful CEO of ANZ in New Zealand for many years delivering outstanding shareholder value before his exit-  they are rightly questioning how incentive schemes work and what the controls on them are in terms of pay-outs.

Organisations need to ensure strong governance (at every stage of the employment process) particularly from the Remuneration Committee around management of the CEO.” – Cathy Hendry

Executive pay transparency is a governance issue of course and increasingly Boards will look to ensure they have better systems in place to address these shareholder concerns going into the future. For listed companies, given the demands of the NZX Code of Corporate Governance, there will be less mercy in the future from eagle-eyed analysts and media as to what happens on the forced exit of a senior executive given they will have a wealth of new information such as the KPIs, amounts involved, remuneration policy, external advisors used, and the structure/value of Short Term and Long Term (STI and LTI) schemes.

Strategic Pay’s 2019 CEO and senior executive survey shows that 81 percent of participating organisations reported offering some form of short term incentive, other than commission or bonus to their chief executives.

There has also been a steady increase in the proportion of private sector senior executives who are eligible for short term incentives (STI) (83 percent reported eligible in 2015 vs. 89 percent reported eligible in 2019).  This suggests the appetite for at-risk pay is getting bigger.

Tauranga-based senior consultant with Strategic Pay, Cathy Hendry, notes that consulting work has shown that if you focus on the following three areas in particular, organisations will be able to better manage and get across externally what they are doing with the pay of senior executives.

“Organisations need to ensure strong governance (at every stage of the employment process) particularly from the Remuneration Committee around management of the CEO,” said Hendry.

“In addition if you are using incentive pay, make sure the rules are crystal clear including what the exit clauses are. Finally, understand how transparency works in today’s world.”

While the manner in which executive pay is discussed may be galling, it’s better to front foot it rather than attempting to ignore the public concerns, said Hendry.

In a more transparent pay environment, Boards and organisations will need to ensure they are relying on robust sources of information when setting CEO and executive pay. With data from 643 organisations, Strategic Pay’s recently published CEO and Senior Executive Report is designed for Boards, CEOs and Senior HR practitioners requiring accurate data on remuneration and benefits for chief executives and senior executives across the New Zealand market.

The report is now available for purchase. Email cathy.hendry@strategicpay.co.nz to find out more.

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