How to fix obscene pay rates

The recent announcement that Fonterra has now reduced numbers so that only 14 senior staff are paid more than $1 million a year, and its chief executive just over $2.2 million, does nothing to ease concerns about excessive pay. There is no justification for any Fonterra staff below the chief executive to be paid such sums and, across the organisation at all levels, it would not be unfair to label pay packages as obscene.

The sad fact is that Fonterra is the tip of a large iceberg; out-of-control salaries dominate the New Zealand senior executive landscape. If consumers only knew what was being paid at Fletcher Building and similar organisations at the upper management levels, they would be reeling in shock. Even universities are in on the game, with vice-chancellors receiving in excess of $750,000 and, across the Tasman, well over

$1m.

New Zealand has blindly followed the United States model of remuneration over the past 40 years, and boards and recruitment consultants have together camouflaged discussion on what is fair reimbursement for quality leaders, relying on the ill-conceived ‘‘market forces’’ as an excuse for poor logic and lack of knowledge. Recruitment consultants are often paid a percentage of the first year’s salary package, providing an incentive to push payments higher. Japanese chief executive pay, by contrast, is about a tenth of US levels.

A 2018 book by Deborah Hargreaves, Are Chief Executives Overpaid?, describes the experience in Britain, coming to the conclusion the system is rigged in favour of wealthy elites, with corporate performance having little to do with remuneration. The excuse used internationally and in New Zealand – that pay is set because of ‘‘a global war for talent’’ – is rebutted by Hargreaves, who shows only 1 per cent of firms had poached a boss from abroad.

Former Reserve Bank of Australia governor Bernie Fraser recently came out swinging, stating that executive pay at the big four

Former Fonterra chief executive Theo Spierings pocketed a final payment of $4.6 million, and was on an annual salary of $8m.

Australian banks is out of control, and criticising the imported bonus culture from the US, labelling it a terrible development.

The work by Swiss behavioural economist Professor Ernst Fehr, research by the United Kingdom High Pay Commission, and work out of the Harvard Business Review group confirms there is little value in performance pay incentives, yet this approach dominates chief executive remuneration.

Steven Clifford, a US commentator, calls the problem ‘‘the CEO pay machine’’, and through both quantitative and qualitative analysis, concludes that CEO pay is nothing to do with actual performance, and is destructive to company operations.

It does not take an academic paper to realise things are out of hand. Any worker can look at the remuneration of senior staff and quickly see the sums and packages are out of control and unnecessary. This needs to be done:

■ Stop paying bonus and performance pay packages, and pay a simple annual salary for chief executives and senior management.

■ Introduce a high marginal tax rate on all incomes over $300,000 a year.

■ Introduce pay transparency as a potent weapon to disclose pay ratios between senior management and employees.

■ Start talking down senior executive pay at government level. Government comments and interest in this area assist public education.

■ Look at introducing a formula to assist realistic and reasonable reimbursement. The Swedish formula of 12 times the lowest worker in the company is a good start; the NZ Tertiary Education Union says it should be no more than five times the lowest salary.

■ Establish a commission or working group to review remuneration rates and provide guidelines for fair and reasonable reward.

With these steps, we can begin the needed adjustment to turn around the current excesses, and move both public sector and private enterprise board members to tackle the problem. Having actual knowledge of what the research states is a starting point.

Alec Waugh has worked in the public and private sectors, and chairs consumer group Kaspanz.