Ex­ec­u­tive pay is a hotly de­bated topic across the globe. John McGill out­lines three of the most com­mon mis­con­cep­tions about ex­ec­u­tive com­pen­sa­tion.

NZ Business - - CONTENTS -

Three myths about ex­ec­u­tive pay. By John McGill.

EX­EC­U­TIVE PAY CAN be a con­tentious topic of de­bate in New Zealand. On one hand, there are those who recog­nise the unique chal­lenges that ex­ec­u­tives face in terms of mar­ket size and rel­a­tive com­pe­ti­tion. On the other, we have crit­ics who high­light pay gaps be­tween low-level em­ploy­ees and the C-Suite.

There are ar­gu­ments that can go one way or the other. How­ever, it's es­sen­tial to con­sider the dif­fer­ent as­pects of what it means to be a CEO in New Zealand and what we can learn from the man­ner in which these af­fect pay.

To bet­ter un­der­stand ex­ec­u­tive pay, it's use­ful to ex­am­ine three com­mon myths: Myth 1. CEOs are over­paid The mere na­ture of the job re­quires CEOs to make tough calls on ex­port, in­vest­ment and gen­eral nav­i­ga­tion de­ci­sions in our in­creas­ingly com­plex and glob­alised world. And while there is no way of see­ing what the fu­ture holds amongst a Trump ad­min­is­tra­tion, fluc­tu­at­ing dairy prices and other de­vel­op­ments, the calls Kiwi CEOs make now will af­fect busi­ness in the long-term.

Me­dia ar­ti­cles still of­ten sug­gest that ex­ec­u­tives are over­paid, with some re­ports even claim­ing they make as much as 300 times more than the av­er­age worker. How­ever, as Tim Worstall – a fel­low at the Adam Smith In­sti­tute in Lon­don – em­pha­sises, there is a lot more to it than a big pay check. Worstall sug­gests that if the share price of an or­gan­i­sa­tion falls upon its CEO's de­par­ture or death, that per­son was not over­com­pen­sated. The logic is that peo­ple who add more value to their or­gan­i­sa­tion, than it costs to re­tain them, are not over­paid.

While it can be ar­gued that value is rel­a­tive, the fact is that New Zealand's top ex­ec­u­tives are paid up to eight times less than their coun­ter­parts glob­ally. Tak­ing it a step fur­ther, those work­ing in the not-for-profit sec­tor earn around 30 per­cent less than CEOs in the pri­vate or pub­lic sec­tor – and are happy to do so be­cause of their sense of pur­pose in help­ing so­ci­ety. Myth 2. In­cen­tive pay is in­ef­fec­tive It can be ar­gued that ex­ec­u­tives who are mo­ti­vated by per­for­mance-based in­cen­tives are more likely to ben­e­fit an or­gan­i­sa­tion's prof­its. As tech­nol­ogy is ex­pected to re­shape how dif­fer­ent in­dus­tries in New Zealand func­tion within the next five years, this could even­tu­ate in great growth op­por­tu­ni­ties.

W.P. Carey School of Busi­ness man­age­ment professor Al­bert Can­nella Jr. sug­gests that "if you want to in­crease prof­its and take a busi­ness to a higher level, the think­ing is that you have to take cal­cu­lated risks".

As such, if Kiwi busi­nesses com­pen­sate their ex­ec­u­tives through in­cen­tive pay strate­gies, they can pro­mote healthy risk tak­ing. Whether these risks are re­lated to tech­nol­ogy or not, the key re­sult from in­cen­tive strate­gies is that it al­lows ex­ec­u­tives to push bound­aries and forge ahead in their in­dus­try. Myth 3. There's a lack of per­for­mance ac­count­abil­ity A num­ber of peo­ple be­lieve that boards don't hold ex­ec­u­tives ac­count­able for per­for­mance, es­sen­tially in­sin­u­at­ing that the C-Suite can sit back, re­lax and get paid for do­ing noth­ing. Con­sid­er­ing that over-reg­u­la­tion is among the ma­jor con­cerns and chal­lenges for New Zealand's CEOs, the re­spon­si­bil­ity to make cru­cial de­ci­sions on a daily ba­sis is one of the main ar­gu­ments against this con­cept.

More­over, while ex­ter­nal fac­tors such as eco­nomic down­turns might im­pact a com­pany's per­for­mance, it is up to an or­gan­i­sa­tion's board mem­bers to as­sess whether a CEO has de­liv­ered the ex­pected qual­ity of work. In line with this, New Zealand's Cor­po­rate Gov­er­nance Fo­rum clearly states that it is the board's re­spon­si­bil­ity to not only em­ploy an ap­proved CEO, but also en­sure that there's no un­fet­tered de­ci­sion-mak­ing power with just one in­di­vid­ual.

This means that if an ex­ec­u­tive does not per­form, the board not only has the abil­ity but re­spon­si­bil­ity to take ap­pro­pri­ate ac­tion – some­thing that can lead to con­tract ter­mi­na­tion. Fur­ther, the in­creas­ing need for CEOs to be some­what knowl­edge­able in terms of tech­no­log­i­cal de­vel­op­ments only en­hances the pres­sure on ex­ec­u­tives to per­form in a more di­ver­si­fied way than a decade ago. John McGill is the CEO at Strate­gic Pay. Strate­gic Pay pro­vides ex­pert in­sights and ad­vice based on our sur­vey re­ports and in­sider knowl­edge. For more in­for­ma­tion on New Zealand's ex­ec­u­tive pay, con­tact the team at Strate­gic Pay.

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