REMUNERATION

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

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.