Keeping the shareholders satisfied - and the bosses honest

By NZPA

Friday 11th October 2002

Telecom's annual meeting this week brought back into the spotlight the gnarly issue of executive and director pay.

How much are they worth? Are they being paid too little? Or too much? And how should they be paid?

In the wake of Enron's and other company excesses coming to the fore this year, chief executive pay packets are being scrutinised very closely indeed.

It also brought to the surface issues of corporate governance which has had boards around the country reviewing the honesty and transparency of their procedures.

But most observers here feel New Zealand business culture cannot really be compared to the States.

David Newman, chief executive of the Directors' Institute, says the United States has a culture of greed, fuelled by the need to present positive reports every quarter. The pressure to cook the books is immense.

"We don't really have that here, and thank God we don't ... and of course you've got the whole options scheme and remuneration policies in the States which are much more performance related than they are here."

Yet the Shareholders' Association campaigned strongly at the Telecom meeting to align directors' fees and senior executives' pay with the company's performance.

The concept, said association chairman Bruce Sheppard, would not punish them if the company's share price dropped, but it would reward them better for creating greater value for shareholders.

He put forward several resolutions, all of which were lost but not without some measure of support.

He called for an end to share options and retirement fees, and asked the board to review both directors' and senior executives' remuneration with company and personal performance in mind.

Retirement fees were a payment for "time in the saddle," he said. "We should be paying them for mustering sheep."

And he regarded share options as an i nvitation to executive corruption and "a disincentive" to employees if the share price sinks below the issue price.

Better to pay in time-locked stock, giving the holders a greater interest in the company's long-term fortunes.

"Options are the core, or at least very close to being the core, of the Enron debacle," he told Telecom shareholders.

"They create endemic conflicts of interest, they do create short term-ism no matter what you say, because management focuses on the share price."

In this, Mr Sheppard has found a precedent in AMP, which recently announced it was ditching its share options for staff in favour of new long-term performance-based incentives.

In its defence, Telecom pointed out that 87 percent of its staff already had some kind of performance-related component built into their salaries, a feature which increased with responsibility.

Chairman Roderick Deane opposed the idea of incentives for directors, saying set fees for directors were easier and the legal norm in Australia.

But he noted the company was moving away from share options towards restricted shares -- shares which cannot be sold for a specified period of time.

Mr Newman agrees with Dr Deane. He says it's not necessary to throw out the share option scheme, although he favours modifying things that don't work.

And he also champions set fees for directors. To do otherwise just encourages the greed mentality.

"I don't think you have to incentivise directors to perform.

"What you've got is a set of professionals sitting around a board table working in the best interests of the company. In some respects, they're no different to lawyers or accountants or any other advisers you would use, and I think there's a danger in going too far down the (track of) linking their pay to performance."

"It sounds good, and I think for grandstanding purposes it'll attract a lot of favour among minority shareholders, but I think in reality that there's very little evidence that performance pay at board level, even at chief executive level, actually delivers results."

What he does feel, however, is that directors are chronically undervalued.

"I think that directors are underpaid for the work they do currently. I think if you look at the workload now on directors and it can only increase as a result of overseas problems.

"Directors can no longer sit above the company without becoming far more involved in, not the day to day activities, but the strategic direction of companies. And that involves a lot more time than I think people would appreciate."

With the average director getting under $30,000, Mr Newman says he frankly wouldn't get out of bed for the fees some directors are getting, but there's a reluctance among boards to go to shareholders for regular increases in their fees.

But in turn, he says, there's an increasing recognition that directors will need to better skilled . The days of sitting on half a dozen boards and taking a low fee for each are gone.

"The focus on companies activities by directors is going to get more intense."

This is also why he feels there is still an argument for retirement fees.

"I think the issue one ought to attack is the overall level of remuneration and as long as it's lower than it ought to be, then I think there's a place for retirement fees."

Not much argument from Bruce Sheppard there. He agrees that you get what you pay for -- all he wants are clear and fair ways of measuring that.

He told Telecom shareholders their board was "in the best position to work out how they should be paid, this board is in the best position to determine how they can ally their interests with our interests, and we should not be hung up on how much they earn, or necessarily what form it takes."

But "we should be fundamentally concerned about their performance and we should pay them well for performing".

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