Policy #5: Executive Remuneration

Date Approved: July 2018
Effective From: July 2018

Future Review Date: Please note this policy is currently under review, with significant amendments planned. Contact NZSA with any specific questions.

Application: This policy applies to all NZX listed companies.

Purpose: NZSA maintains a range of policies to positively influence the behaviour of all participants in the NZX listed company sector. These policies should be read in the context of the NZSA Policy Framework Statement.


This policy document dates from July 2018.


1.0    Policy: Executive Remuneration

1.1   The structure and disclosure of executive remuneration should be concise, easily understood and transparent to investors. 

1.2   The base salaries of senior executives need to be, and in the great majority of listed companies probably already are, at sufficient levels to provide full and appropriate compensation where performance is adequate but not superior. 

1.3   Incentive payments in addition to base salaries are acceptable where these reward superior, as against merely satisfactory, performance This must be proven by the achievement of predetermined and challenging targets. 

1.4   It is appropriate for the remuneration package of a CEO to include a substantial “at risk” element. As a broad indication only, intended as a guideline for any board which is planning the structures of its CEO’s remuneration package, an incentive award equal to the amount of the base salary package is acceptable for a CEO who has achieved significantly superior performance. Payments which are significantly above this level, other than on an exceptional basis, are generally seen as excessive and unacceptable to retail shareholders. 

1.5   Long-term incentive (LTI) arrangements based on pre-set performance hurdles and properly aligned with the interests of shareholders are the appropriate means for providing CEOs, and possibly other senior executives, with motivation and reward for demonstrated superior levels of performance. Recommended guidelines for achieving this alignment are set out below. 

1.6   Short term incentives (STIs) are questionable as incentives for CEOs and should not exceed 33% of at risk pay. They should be used only where the performance targets support and are entirely consistent with the company’s long-term goals. A higher proportion of STI arrangements may be appropriate for other senior executives, providing these awards are conditional upon achieving pre-set performance targets that are clearly disclosed to shareholders. We do not generally support STIs for CFO and internal audit personal, except to the extent that they recognise superior individual performance of their tasks. Linking them to company financial performance creates an irreconcilable conflict in our view. 

1.7   Boards must not permit executives to enter into arrangements which are not in the best commercial interests of the company and whose primary purpose is to reduce the risk elements essential to effective incentive schemes. 

1.8   Termination payments to failed executives which are above statutory entitlements or that include additional amounts in lieu of notice is unacceptable to retail shareholders. Boards should consider this when initially negotiating departure conditions in employment contracts or subsequently. 

1.9   Golden parachutes are totally unacceptable to shareholders. Other lump sum payments additional to the agreed annual remuneration package, for example, executive retention payments, and compensation for “benefits foregone at previous employers” are also in principle unacceptable to shareholders. We accept that in rare cases these may be appropriate. Any such exceptions need to be very clearly described and strongly justified as being in the company’s best interests both at the time of announcement and subsequently in the remuneration report. 


2.0    Commentary

2.1   Rates of increase in executive remuneration have accelerated over the past decade to such an extent that multi-million-dollar packages are becoming commonplace in larger listed companies. The gaps between the pay of CEOs and senior executives and the workforce in general have become excessive and are the subject of increasing levels of valid criticism. 

2.2   Retail shareholders have long been sceptical of the need for New Zealand CEOs to be remunerated with such largesse. The NZSA has questioned the frequently repeated claim by boards, of having to meet international standards particularly those prevailing in Australia. We have little faith in the advice of “independent” remuneration consultants contracted by, and accountable to the very people they are advising on. 

2.3   Retail shareholders have widely condemned the large termination payments granted to CEOs and others who have left their positions on retirement, resignation or following unsatisfactory performance. There is also increasing concern about high levels of short-term incentive payments and the potential for executives to focus on achieving short-term goals to the detriment of the longer-term interests of all shareholders and the company. 

2.4   The structures of those components of remuneration packages which are classified as long-term and short-term incentive payments, often described as “at risk”, have been increasingly challenged with some success. It is now the norm for payments to require pre-set performance hurdles to be met though too often, the composition of these performance metrics remains inadequately disclosed. Even when information is forthcoming, the split between hard financial measures and soft non-financial items is not usually spelt out. Overall, progress has been modest. There remains a widespread view that incentive payments are too easily given for performance which is average and by no means superior. The perception is that in many cases, these payments are neither earned nor well aligned with returns generated for shareholders, while some directors appear to see executive incentive schemes as part of a base salary package. 

2.5   During recent periods of global financial crisis, it has become apparent to many shareholders that incentives embedded within remuneration structures are not reflective of commercial reality and may in some cases encourage activities that conflict with long term wealth creation. The NZSA does not support statutory restrictions on remuneration levels as we believe it is the responsibility of the boards of companies to deal with the problem. 

2.6   As a minimum, we believe shareholders should be provided with a comprehensive executive remuneration report similar to that required in Australia. Shareholders should have a non-binding vote on the remuneration report at company meetings, as a way of giving feedback and guidance to boards when they consider these issues. There is considerable merit in the Australian requirement that two consecutive non-binding votes of at least 25% against the remuneration report leads to directors being dismissed. This would introduce a degree of discipline and give boards a strong incentive to counter some of the more aggressive senior management demands. The NZSA will be considering this matter further in the future. 


3.0   Voting Discretionary Proxies

3.1   The NZSA will vote against remuneration or incentive schemes that do not generally meet the guidelines and objectives of the policies outlined above and in the attached appendix. 

3.2   Where there have been significant breaches of these guidelines and the board concerned has failed to take appropriate corrective action, the NZSA intends to vote discretionary proxies against the re-election of any of the directors at the next Annual General Meeting of that company. 



NZSA CEO Remuneration Framework



Long-term Incentives 

The NZSA views long term incentives as a means of:

a)    rewarding executives for creating shareholder value and

b)    providing incentives to create further value. There is no single test that adequately meets the requirements of both objectives. Consequently, LTIs should be based on two components, each subject to achieving company performance above a hurdle threshold, with all details clearly set out for shareholders at the time of adoption. 

One component should be clearly aligned with shareholders’ interests and based on the achievement of total shareholder return (TSR) above the median for an appropriate comparator group. In this case, vesting should commence at a modest level (no more than 10%) only when the company achieves a 51st percentile ranking and should increase progressively to reach full vesting no earlier than at the 75th percentile of the group.

The second and in our view larger component should provide an incentive to achieve long-term improvement in company performance, typically the achievement of a hurdle that is based on a pre-set and superior level of increase in company earnings. This can be measured by, for example, growth in earnings per share, return on funds employed or a basket of other verifiable metrics that the board considers best reflects long-term progress across the cycle.

We do not favour the use of earnings per share as a sole benchmark, as this could encourage excessive leverage.

Long term incentive awards should be made in equity bought on market or cash. We are opposed to share option-based schemes as these dilute shareholder equity over time. Ghost option schemes are acceptable if the payment resulting is made in cash. This overcomes the dilutionary effect. 

LTI performance should be assessed over a fixed period of no less than three consecutive years, with vesting at completion of the full assessment period. 
The share prices used within the calculation of the total shareholder return, i.e. those at the start and end dates of the vesting period, may be subject to short-term smoothing to avoid the unintended effects of price volatility, (for example, averaging over the three-month period around the start and ending dates of the vesting period). Rolling 3-month returns are also acceptable as a method of smoothing the effect of one off short-term events. However, in such cases the formula used must be specified within the LTI scheme at the outset. 

Should TSR be negative over the vesting assessment period there should be no award for that component, irrespective of relative performance against the comparator group. 

There should be no retesting of performance against LTI hurdles. The need for retesting is eliminated if the vesting period is adequate and short-term smoothing is adopted. 

In order to promote and support management succession and other strategic long-term objectives, CEO’s equity-based plans should provide that a meaningful portion of any equity awards shall not be made available to the CEO for at least two years after vesting. This restriction should apply irrespective of whether the CEO remains in the position. 

There should be no company loans associated with LTIs as this decouples any alignment with shareholders’ interests that might otherwise have existed and is an inappropriate use of shareholders’ funds. 

Short-Term Incentives 

Variations exist between companies from the setting of aggressive annual budgets which stretch mangers potential, to the setting of conservative budgets to promote confidence in achievement. Short term incentives should take this into account, but generally as they concern the achievement of annual budgets, they should not form more than 25% of remuneration. 

At least 50% of STI awards should be based on verifiable financial performance metrics at the company level and/or of the area of responsibility of the individual executive. 

The remainder of any award should be based on quantifiable performance indicators that are set at the start of the period. 

In the interests of transparency, the performance indicators used to determine STI awards should be disclosed to shareholders. Disclosure may be retrospective if necessary to avoid disclosing commercially sensitive information. 

Disclosure of STI amounts paid to senior executives should be supported by details of the maximum and minimum amounts available to be earned under the scheme. 

A proportion of STI awards (NZSA recommends 50%) should be in the form of equity required to be purchased on market. This equity must not be made available to the executive for at least two years after the end of the relevant performance period, irrespective of whether the executive remains in the position. We see this as a useful way to avoid inappropriate short-term decisions which may have the effect of reducing long term company performance.


Related Policies

Policy 12 – Golden Parachutes

Policy 13 – Remuneration Report

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2 Responses

  1. Anjali Rajan says:

    Hi Oliver, I read in NZ Herald today that a new template for reporting CEO remuneration for NZX companies are in the works by NZSA. Can you please give an indication of when that will be published? Thanks

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