Opinion: Kiwis catching on to incentive payments

By Kate Perry of NZPA

Friday 30th July 2004

Hitting targets to bag more pay, or needing an incentive to work hard, have not traditionally been the New Zealand way.

But this week sharemarket heavyweight Contact Energy outlined a bonus incentive scheme which could significantly boost its executives' pay packages.

Contact's remuneration plans haven't always met with approval but this one got a cautious thumbs up from the Shareholders' Association.

Contact's top executives will have to meet a series of targets over the next three years to qualify for performance bonuses, which will be equal to about 15 percent of their base salaries and will come in the form of shares bought in the open market.

The minimum performance goals include earnings, dividend and share price appreciation targets, and the number of shares bought will be based on the share price at the start of the three years.

Although the Shareholders' Association has vocally opposed share option plans and pay rises for directors in the past, incentives for executives seems to be a different story. Yesterday association chairman Bruce Sheppard gave Contact's bonus plan 7.5 out of 10 points.

Despite misgivings about incentives based on a company's share price, which is not totally in control of executives or the board, Sheppard said the good points of the scheme were its transparency, the fact it applies to the level below CEO and that at least half of it is based on targets over which the management has control.

"It involves the purchase of shares on-market, rather than the issue of new shares by the company, so it's not dilutory and it doesn't involve the use of options," Sheppard said, adding ideally he would like to see even more management levels covered by them.

Contact's chairman Phil Pryke, has said the incentive scheme is "best management practice", but many other New Zealand companies prefer to stick to flat rate, base salaries, rather than packages which vary depending on an employee's performance.

Sherry Maier, remuneration practice manager at human resource consultancy Sheffield in Auckland, said performance payments were under-represented in New Zealand's pay packages.

Sheffield's annual survey of chief executives' remuneration, which was released earlier this year, showed performance pay such as bonuses, incentives and profit shares made up just 14% of New Zealand chief executives' packages, compared to 30% for Australian chief executives.

She said many New Zealand companies don't offer anything in the way of performance pay, preferring to stick to just a base salary - which she said builds in fixed costs.

"If you have a pay-for-performance plan that is really designed to be `at risk', you are really only paying out if things are going well," Maier said.

In her opinion there were several reasons New Zealand lagged behind other countries when it comes to paying extra for a job well done, such as the fact the marketplace is quite insulated.

While large New Zealand companies, particularly those with offshore activities, are following global practices in their pay decisions, locally based, locally focused companies do not seem to have seen the need.

Sheffield's survey found that 86 percent of New Zealand chief executives who work for an internationally owned company received performance related payments, giving them a 30% higher value payment package than executives on a similar base salary who report to New Zealand owners.

But apparently it's not just reluctance on the part of companies that has led to low levels of performance incentives. The conservative New Zealand nature also plays a part - with many New Zealanders uneasy at the thought of having a large portion of their income up in the air.

"It's a fairly conservative, egalitarian society and I think the feeling is that `at risk'pay is a little bit uncomfortable for people," Maier said.

There is also a high proportion of public sector companies in the New Zealand business scene and Maier said the public sector "... really struggles with the notion of performance pay".

While New Zealand might lag behind in the performance payment stakes, it also lags behind in fat-cat corporate scandals.

The downside of incentive payments is when they are no longer seen as hard earned bonus and are instead seen as a right. The question of when incentive becomes greed has become a contentious issue in the scandal plagued, post-Enron world.

Inflated pay packets of United States executives have been increasingly under the spotlight, and one of the latest high profile, high-flyers to have his nose hauled roughly out of the trough is the former head of the New York Stock Exchange (NYSE) Richard Grasso.

Grasso was paid approximately $US188 million ($NZ300m) during his eight year tenure, an amount New York Attorney General Eliot Spitzer took exception to.

In fact, Spitzer was so outraged he launched court action to try to force Grasso to repay $US100 million, calling the pay "inappropriate and illegal".

Grasso's base salary for the period is not entirely clear, but Bloomberg reported he received $US1.3 million in 1995, and $US1.4 million a year from 1996 to 2002. But a letter from the head of the exchange's pay committee shows his actual remuneration totalled $US12 million in 2002 and $US30.5 million in 2001.

The ongoing court case is probably as good an incentive as any to make sure performance matches remuneration.

It puts the controversy over the payments of $6.5m over two years to former Contact boss Paul Anthony in 2001 related to the successful floatation of Contact somewhat in the shade.

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