RE­MU­NER­A­TION

NZ Business - - CONTENTS - John McGill is the CEO at Strate­gic Pay.

Why ex­ec­u­tive re­mu­ner­a­tion should be di­rected by the board. By John McGill.

Ex­ec­u­tive re­mu­ner­a­tion is at the cen­tre of an on­go­ing global de­bate. Some ar­gue against what is per­ceived as an un­fair dis­tri­bu­tion of wealth, while oth­ers claim that ex­ec­u­tive re­mu­ner­a­tion is de­ter­mined by the mar­ket and ap­pro­pri­ate to the KPIs of an ex­ec­u­tive role. By John McGill.

ONCE UPON a time, a board of direc­tors may well have con­sid­ered their in­volve­ment with ex­ec­u­tive re­mu­ner­a­tion to be an in­ter­fer­ence in how the com­pany gets run. Th­ese days, the same ap­proach would be con­sid­ered bad cor­po­rate gover­nance.

Ex­ec­u­tive re­mu­ner­a­tion is about far more than the dol­lar amount. It's about re­tain­ing key tal­ent and in­cen­tivis­ing high-per­for­mance. This, in a nut­shell, is why the board of direc­tors should over­see, or at the very least have an in­volve­ment in, re­mu­ner­a­tion pack­ages for ex­ec­u­tive of­fi­cers.

THE ON­GO­ING DE­BATE

Ex­ec­u­tive re­mu­ner­a­tion is at the cen­tre of an on­go­ing global de­bate. On one hand, peo­ple are ar­gu­ing against what is per­ceived as an un­fair dis­tri­bu­tion of wealth, while on the other, many claim that ex­ec­u­tive re­mu­ner­a­tion is de­ter­mined by the mar­ket and ap­pro­pri­ate to the KPIs of an ex­ec­u­tive role.

Of course, the is­sue is far more com­plex than that, more so than we have space to elab­o­rate. But one thing is clear – trans­parency is all im­por­tant – to the share­hold­ers, the com­pany and to the pub­lic at large.

The last point is im­por­tant and not just for listed com­pa­nies. Co­op­er­a­tives (Fon­terra and Ravens­down for ex­am­ple), pub­lic sec­tor or­gan­i­sa­tions and any­one pro­duc­ing an an­nual re­port are in­creas­ingly be­ing seen as re­quired to ex­plain ex­ec­u­tive pay, its struc­ture, the quan­tum's of pay, and CEO ac­count­abil­i­ties. How­ever, for­mally in New Zealand at present, the most strin­gent rules are for listed com­pa­nies.

The NZX Cor­po­rate Gover­nance Code rec­om­mends the fol­low­ing: • Re­mu­ner­a­tion should be based on the scale and com­plex­ity of the role. It should re­flect the per­for­mance re­quire­ments and ex­pec­ta­tions at­tached to an ex­ec­u­tive role. • Per­for­mance-based re­mu­ner­a­tion should be ex­plic­itly linked to clearly out­lined tar­gets that align with the or­gan­i­sa­tion's busi­ness ob­jec­tives. It should be ap­pro­pri­ate to the com­pany's risk pro­file. • Eq­uity-based re­mu­ner­a­tion should be de­signed in such a way to sup­port long-term ob­jec­tives and not pro­mote un­nec­es­sary risk tak­ing. There is no one-size-fits-all ap­proach to ex­ec­u­tive re­mu­ner­a­tion strate­gies and es­tab­lish­ing a frame­work for re­mu­ner­a­tion is fairly com­plex and should be un­der­taken on a case-by-case ba­sis.

WHAT ROLE SHOULD THE BOARD TAKE?

An ex­ec­u­tive pay pack­age should be ef­fec­tive for the com­pany, at­trac­tive to the ex­ec­u­tive, and jus­ti­fi­able to share­hold­ers – af­ter all, the en­tire ex­ec­u­tive re­mu­ner­a­tion ar­range­ment must be dis­closed in the an­nual re­port. The board should, at the least, work to en­sure that ex­ec­u­tive re­mu­ner­a­tion ticks the afore­men­tioned boxes. While di­rectly in­volved in all as­pects of CEO pay, boards are also in­creas­ingly tak­ing a greater in­ter­est in the sec­ond tier of the or­gan­i­sa­tion in terms of re­mu­ner­a­tion pol­icy as well as the ac­tual struc­ture of the re­mu­ner­a­tion.

Ro­bust de­ci­sion-mak­ing in th­ese lat­ter ar­range­ments are also im­por­tant as it will be the board that will in­creas­ingly be put un­der the spot­light when the is­sues are raised ei­ther at AGMs or other fo­rums to ex­plain poli­cies, pay- outs, or prob­lems.

A board may not have the re­sources or knowl­edge to build up re­mu­ner­a­tion pack­ages from scratch, and may opt to seek ad­vice from a third party con­sul­tant. This is fairly com­mon, with a re­cent PwC re­port not­ing that af­ter 900 pub­lic com­pa­nies were sur­veyed in 2017, 90 per­cent had worked with a com­pen­sa­tion con­sul­tant to cre­ate ef­fec­tive ex­ec­u­tive re­mu­ner­a­tion pack­ages.

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