Time to rethink how to pay bosses
shareholders. And when Covid hit he took an immediate 50 per cent cut in base pay. That’s behaviour aligned with the interests of shareholders, staff and customers.
There is a problem with how chief executive and board compensation is structured. Far too much is paid for delivering short-term results, too little for long-term gains in shareholder value. And paying for long-term results would discourage short-term jacking up of the share price via excessive cost cutting and corporate transactions of dubious quality.
A straw man for chief executive and board compensation could be called the 10 times 10 rule. A chief executive should be paid no more than 10 times the median salary of their workforce.
More than that and they are probably out of touch with colleagues and customers. There are exceptions to this, but it’s a fair baseline.
And any shares, rights or options granted should vest after seven to 10 years, indexed to how well the company does versus the overall share market.
This could be a large amount: chief executives that do a great job longterm should be very well paid. In many cases, it might be more than they are currently paid.
It’s not how much they get paid that matters, it’s how they get paid.
Paying for long-term results helps encourage continuity of succession. Nothing scares me more than a company hiring a ‘‘star’’ manager externally, who comes in at the top without the deep internal knowledge of how the company works and its culture. This fails more than it succeeds. Fonterra is a classic case of this, and it is no surprise that it is performing better with an insider at the helm.
In the United States, the average large company chief executive now gets paid 320 times their average worker, up from 21 times in 1965. We don’t want that in New Zealand, it is not fair and doesn’t lead to better decisions.
I have had seven-digit pay packets in my career. I would have worked for a fraction of that and it didn’t improve my decisions. Shareholders weren’t winning, I was.
It is time for more shareholder activism on executive pay.