In light of controversy over executive pay levels, Human Resources looks at some of the latest trends in the market, examines some of the common criticisms, and explores HR’s role in the executive pay debate
In light of controversy over executive pay levels, Human Resources looks at some of the latest trends in the market, examines some of the common criticisms, and explores HR’s role in the executive pay debate
The chief executives of Australia’s top companies have recorded a 20 per cent rise in total remuneration in 2003 – double the increase of just a year ago.
A recent report into 48 of Australia’s top 100 companies found that 2003 provided strong performance-based rewards for CEOs and executives. Executive pay increased in the past year as executives cleared their pay-related performance hurdles and company profits rose strongly.
The report for the Hay Executive Reward Service shows that aggregate pay (including fixed salary as well as incentive-based reward) for CEOs rose by 19.9 per cent compared with 9.4 per cent in 2002. The increase was driven by most of the sample of business leaders hitting or exceeding agreed business targets, triggering performance-based payments. The survey showed that CEOs achieved 105 per cent of their incentive-based targets, compared with 76 per cent in 2002.
“More of executive pay is tied to incentive-based payments, so when CEOs hit their performance targets they reap the rewards,” said Kim Neuhold, a senior consultant in Hay Group’s executive remuneration practice.
“It is important to interpret these figures as not indicating that chief executives have been given a major up-front pay rise. In fact, the rate of increase in fixed salaries in 2003 was the same as in 2002.”
She said that the report found boards of companies are increasingly setting performance-related pay targets for their executives to match. If executives meet their targets then they benefit, but if they don’t their pay suffers because more than half of the total reward paid to CEOs is linked to performance incentive schemes.
“In 2003, it just happened that most of the senior executives fully met or exceeded their required performance targets, which has significantly increased their total reward this year,” she said.
The Hay Executive Reward Servicereport is a leading indicator of trends in executive pay well before all the companies have released their annual reports. Since it is based on a confidential survey, companies are able to reveal the trends in their executive remuneration well before they are obliged to tell the broader marketplace.
The survey showed the increase in the fixed pay component of remuneration for both CEOs and senior executives in 2003 remained about the same as in 2002.
The average increase in fixed reward for executives who were in their positions in both 2002 and 2003, was 6.6 per cent for CEOs and 6.9 per cent for senior executives.
Even with the greater performance focus on senior management teams, the report shows the ‘at risk’ components – both short and long-term – form a much larger proportion of aggregate reward for CEOs (60.2 per cent) than for senior executives (38.2 per cent).
“This trend of increase in the ‘at risk’ components reflects a greater emphasis being placed on company performance and assessed individual and team contribution to that performance” Neuhold said.
Executive remuneration criticisms
Executive pay has come in for more than its fair share of criticism recently, which Neuhold said she believes is justified in some circumstances.
“A lot of the criticism around high payouts has been about people who have not performed or who have left organisations and been paid out in the duration of their contracts, for example. So where it’s not performance related, I can certainly understand that criticism,” she said.
“Part of the criticism is just the overall high level of executive pay, and from some perspectives that is a valid criticism. Fortunately or unfortunately, depending on which side you’re coming from, that is the market for chief executives these days. As Australia is now part of the global economy, CEO and other senior executive pay levels have increased quite dramatically – closer to the US levels.”
Allan Berry, a senior consultant in Hay Group’s executive remuneration practice, said he believes that criticisms around executive pay levels do represent a genuine community dissatisfaction. However they are more likely based on subjective individual values rather than an objective understanding of the marketplace..
“It can be very difficult for a mum and dad shareholder to understand. If they’ve perhaps gone through their working life, and earned $50,000 a year to then retire on their investments, it’s very difficult for them to accept that anybody is worth $5 million a year, or any large number you might want to nominate.”
Berry said that this lack of understanding and individual attitudes are common causes of criticism over executive pay. However in today’s market, it’s becoming a question of what it takes to attract and retain executives with a particular set of skills and capabilities in a competitive marketplace.
“Senior executives can have a fairly significant impact on the outcome of a business, so the cost-benefit ratio is very heavily weighted in favour of getting good people. On the other hand if you’ve got someone who isn’t performing then whatever you’re paying them is too much.”
Executive pay and HR’s role
As the executive pay market continues to evolve, Neuhold said it’s imperative for HR and remuneration professionals to keep on top of what’s happening with market trends
“Their role is in getting hold of that information and providing that to the chairman or the board or whoever’s making those decisions, so that they’re well placed to make sound decisions in the context of what’s happening in the market,” she said.
Berry agreed that HR plays an important role in helping boards make decisions about executive remuneration, but sounds a note of caution in the process.
“It can be a difficult role for HR because if they’re part of the executive team, then it requires a degree of professional integrity to act as a highest broker, if you like, in providing that information. It involves acting on behalf of the company and not acting on behalf of the CEO or the individual executives,” he advised.
He said this can be a difficult role for HR, but it depends heavily on the approach taken by the CEO and executive team.
“If they’re balanced and objective about it then it makes life easier for HR, but if they are overwhelmed with self-interest then it puts more pressure on HR. That’s one of the reasons why many companies look to use external advisors, in order to be seen as more independent than the internal HR people can be.”
The Hay Executive Reward Servicereport is based upon the latest information gathered in a confidential questionnaire of 48 of the top 100 companies in Australia focused on CEO pay rate movements as well the top two tiers of executives who report to the CEO.
