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Peer Review Overview
I had hoped to have an independent party volunteer for this process, but as none have I will endeavor to be impartial.
If I attempt to distil support down to 3 key propositions included in our paper the level of support among those who have reviewed the paper are as follows:
- 1.Should executives be paid on performance?
- Eight papers would support this proposition and one would not.
- 2 Should the performance be business based KPI based rather than share price based?
- Five papers would suggest yes, and three would favor share price as a performance indicator. You will need to read the papers for yourself and judge the background of the contributors to assess the significance of this.
- 3. Should CEO reward be transparent?
- This is a straight down the middle item, with half thinking it is appropriate and half disagreeing, and those that disagreed with this proposition did so strongly, while those agreeing did so reluctantly.
Conclusion:
- In respect of our key propositions the major item of transparency needs more thought by all parties. The reality however is that international trends in Europe are heading this way in any event, and if the Internationalization of this issue is to be managed against an indigenous solution it is time for all interested parties to start thinking about it.
Interesting Observations:
Martin Devlin:
On performance based reward:
- “Once expectation has firmed up, the focus becomes not one of aspiration or endeavor but one of retention.”
John Day:
On share options:
- “Options do have a place in appropriate circumstances: why oppose options when from 1 January 2005 they will be fully disclosed and expensed in the companies’ accounts”
NZSA Answer: The method of expensing proposed in an economic nonsense, and it is tax inefficient, employees pay, company gets no deduction.
On standard processes:
- “One size does not fit all, but there are some basic tenants for success……..
- Keep it simple; be transparent; be consistent; reward the whole team.”
Liam Forde:
On the CEOs job:
- “The CEOs role is to create a sustainable business which has enough creativity to keep rejuvenating, enough intellectual capacity to create solutions for its customers and enough resilience to weather the storms. In short leave a legacy (how you might wish your children to turn out)”
On the NZSA fundamental Beliefs:
- “I am not sure how these were put together but they don’t feel like a collective wisdom”
On transparency:
- “The principle here is CEOs should learn to eat their own dog food.”
Business round Table:
NZSA Fundamental Beliefs:
- “By and large the NZSA’s fundamental beliefs have an innocuous “motherhood is good” aspect to them.”
On shareholders Role:
- “Shareholders have lost the plot if they are focusing on executive reward rather than company strategy and shareholder returns.”
NZSA Answer: people will do what you pay them to do so long as it is consistent with their values. Tells us how you are paying your people and we can guess at your strategy in a far more meaningful way that PR drivel. Understanding reward is about understanding strategy.
On transparency:
- “No amount of transparency can tell shareholders if the structure adopted is optimal”
NZSA comment: true, but rational shareholders can judge what they think is optimal for themselves if they are armed with the information.
- “Greater transparency may politicize matters and make it harder to hire the skills desired at an acceptable price.”
Phil Pryke:
CEO Release and clean break:
- “I don’t believe the company should have any hooks after retirement of the CEO”
Will transparency solve the greed envy debate?
- “Only if everyone is rational- I doubt whether many people will ever get there and they are the noisiest and have a huge influence on the public tone of the debate.”
- “I think that life is only rational in the aggregate…..”
Gary Paykel:
Who should be in this debate?
- “The boards of both companies and the CEOs firmly believe the remuneration of our CEOs and senior executives should be set by the board.”
NZSA Comment. Of course. Boards need to be aware of the views of their shareholders almost as much as they need to be aware of the views of the market place. Shareholders can only expect to make the decisions if they are also prepared to accept the responsibility. Modern corporate structures make this impossible hence why only boards can make operational and strategic decisions for companies.
On transparency:
- “The disclosure of the CEOs salary, and that of senior management, with all of its components laid bare, would be counter productive to creating shareholder value”
Mark Verbiest
On share options:
- “We do think commentators have tended to get hung up on the forms of securities offered shares or options. Provided the number issued or funded is not significant in overall capital terms, we don’t think the form of securities greatly matters.”
Graham Brand:
On CFO rewards:
- “However, Chief financial officers are the main ‘gatekeeper’ in the company and, accordingly, rewards based on the company’s performance should be limited for CFOs.”
On CEO clean break:
- “It is clearly part of the role of CEO to ensure proper succession planning is in place and that the company will continue to perform after he has left”
William Falconer:
On partnership:
- “Investors and the CEO are mutually inter-dependant. Wealth cannot be generated adequately by either, and neither can survive without the other.”
On CEO focus:
- “The best companies seem to be those with a strong “proprietor”….”
On simplicity:
- “Complex rules can become an invitation to manipulate and then beget more rules…..”
On At risk reward:
- “If basic targets are not met for reasons of inadequate management and/ or leadership, then the remedy is probably more profound than a salary penalty.”
On transparency:
- “While EPS as a KPI is readily transparent, those that relate to the achievement of certain operational or investment objectives may not be able to be disclosed for reasons of commercial or competitive confidentiality.”
On options:
- “The bonus should be paid in cash. No share, no options.”
On bonus banking:
- “Bonus banking for the CEO is like profit smoothing for the company - don’t do it.”
On Quantum:
Read for yourself, very interesting observations.
Other reactions:
- 1 The lack of confidence in auditors is astounding and disappointing.
- 2 The description of Executive reward as a battleground gained almost universal criticism. The reality is that performing companies are never a battleground. Underperforming companies are always a trial. If at the same time executive rewards are increasing, which is usually the case for some perverse reason; the end outcome is the trial of the CEOs reward in the open court of an AGM. In the interests of such companies in particular and all in general a better way must be found. This issue will get worse with time, demographics; don’t underestimate the coming population changes in western democracies.
- 3 Some of our fundamental beliefs got some brick bats as well. Our beliefs are of course simply back ground so that you know where our opinions come from. Opinions and beliefs are highly subjective and are different for all. It just so happens that these are the beliefs of the executive board of the NZSA, and possibility the majority of our members. The only relevance of these to the reader of our document is to assist the reader to interpret our views on matters of remuneration.
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