Posted by Alec Waugh

Something different to kick start July winter discussion


The Swiss have recently been debating through a referendum that CEO salaries should be pegged to a maximum of 12 times the company’s lowest-paid worker. Known as the 1.12 initiative its driving force was the impact of inequality in society, Not only is the remuneration of top CEO’s continuing to increase at a faster rate than those of their employees, but this trend has been apparent over the last two decades. The time is long overdue not only to question senior level salaries and particularly CEO’s, but to attempt to begin the discussion of what is the formula and method to be adopted in reimbursing organisational leaders, both in the Government sector and private enterprise.

This paper does not intend to supply complete answers, just an attempt to kick start the discussion of the “obscenity” of some CEO salary packages. The bias of this paper is that yearly salaries paid to individuals of millions of dollars are not justified; such sums do not need to be paid to attract quality applicants, everyone has felt powerless to stop the silliness in believing huge amounts of money must be paid, and the way to address the issue is to start talking about formula, public interest, equity and sustainability. What is a reasonable annual salary for a CEO?

Mayor Len Brown in a recent defence of senior Council salary packages ($200,000-$800,000) used the phrase “A need to meet the market”. Well known CEO’s Ralph Norris (Westpac $8 million plus) and Rob Fyfe ( Air New Zealand $3 million plus) are headline acts in this discussion but let’s also focus upon the Water care Auckland CEO salary in excess of $700,000, and the Police Commissioner Salary of about $680,000. In Australia Gail Kelly’s annual pay for Westpac is 5.65 million in cash and 4.3 million in shares totalling $9.2 million. Enormous salary packages are everywhere, and claims of “Pay for performance”, linking executive compensation to the financial success of their company, has become very popular. The problem is how to measure actual performance good, bad or indifferent. It is hard, often subjective, and in difficult years hard to quantify or apply. Solid Energy is a case in point? What CEO honestly believes that all or most of the appreciation in value of their company is due to their own talent. Is the benchmark for comparisons the Prime Ministers salary of $380,000 and the Chief District Court Judge salary of $395,000? What about bonus payments for share market price improvements, and conversely reductions for share market decline? If applied evenly and consistently that practice might have relevance, but I have seen little evidence of this working in practice. In 1996 I went to the United Kingdom and part of that visit was to analyse whether Pay scales linked to specific performance and productivity measures had a positive correlation. The answer then was No, and I suspect that applies today. The challenge of the position rather than the money paid was usually the issue, and leaders that could tap into the potential of all their employees and management at all level, were the ones who produced results.

Dr R A Moodie a fine negotiator of salary increases for police told me in 1990, the next 2 decades would be the rewarding of senior managers and leaders. I don’t think even Rob Moodle realised, just how rewarding market reimbursement would become. My own experience of working primarily in the State Sector but with some experience in private enterprise, exposed me to some very fine leaders, but personally I have never met anyone who I thought justified a salary of $500,000 per annum or more. I think we have all been conned, feeling powerless to stop the ever upward trend, not knowing what to do or say, when outrageous sums are being offered!

This is not a personal attack on the CEO’s accepting the salary package offered, it’s more a reflection on the recruitment consultants, Board directors, shareholders and remuneration authorities that have brought into this sky rocketing phenomena. Oliver Harwick, Executive director of a local New Zealand research group, said the causes of the pay trend were obscure, although it appeared to be a global phenomenon. An alleged shortage of quality leaders and some research indicating leadership was important in a company’s performance, is hardly sufficient evidence to offer one person, an enormous salary package. Will Hutton in a recent article said “The answer is that these super salaries have almost nothing to do with performance, and everything to do with CEO’s keeping up with each other in a status race”. Another commentator Dr Hazeldine said “English speaking countries have allowed top executives to pay themselves so much more than average workers that their salary packages cannot be justified by the productivity differences, so it looks like it’s just that they are taking the money because they can. There is a lack of governance that is striking”. My suggestion is a maximum ceiling of $500,000 per annum for the Chief Executive of a large private company and $350,000 maximum for the CEO of a State Sector organisation.

PS. What is the annual salary for the English football team Manager, the team exiting early from the World Cup competition. $5.8 million. Is anyone laughing!!!!!

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