Time to rethink how to pay bosses
New Zealanders have a strong fairness gene. We care about it as much the Americans care about freedom. It is one of the many things that makes this country so pleasant to live in.
And Kiwis have an acute sense of what is fair or not. No-oneminds someone getting rich, but we mind mightily if the wealth was attained unfairly.
So any excessive chief executive pay runs squarely into public criticism about its fairness, including the 5.84 million rights granted to the six top executives at Air New Zealand recently. The unions called it a tonedeaf action. As a shareholder of Air New Zealand, Simplicity joined the chorus of criticism.
And Rob Campbell, a public company director with very high mana, has just called for a curb on excessive chief executive pay.
The problem with determining chief executive pay is that everyone becomes fixated on how much is paid, and not on how it is paid.
Let me give you an example. Imagine two chief executives, each being paid $2million a year. One gets paid a $1m salary and a $1m bonus if they hit one- to three-year targets. They will tend to act short term. If the other gets $500,000 in salary and $1.5m for hitting five- to 10-year targets, they will think longer term.
This is critical, because most KiwiSaver investors will be shareholders for up to 50 years. What a company returns short-term is largely irrelevant for KiwiSaver investors, it is what they do long-term thatmatters.
And if the directors, who represent shareholders, are paid 100 per cent in cash each year (as nearly all are), they are likely to care less about the longterm impact of the decisions they make.
As a KiwiSaver manager, we have no problem with paying chief executives and directors well. Good leadership is hard and should be rewarded.
You won’t see us complaining about the chief executive ofMainfreight getting paid $2.9m, because he has delivered superb long-term returns to 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 resultswould discourage short-term jacking up of the share price via excessive cost cutting and corporate transactions of dubious quality.
A strawman 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 themedian 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 howmuch 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. Iwould have worked for a fraction of that and it didn’t improve my decisions. Shareholdersweren’t winning, I was.
It is time for more shareholder activism on executive pay.