Governance Bites #135: CEO and director remuneration, with Dr John Peebles

In this high-value episode of Governance Bites, interviewer Mark Banicevich speaks with Dr John Peebles, a governance PhD and experienced chair, on the explosive topic of CEO and Director Remuneration.
Dr Peebles reveals how New Zealand’s executive pay is rapidly shifting from a conservative, base-salary model to an aggressive, US-style incentive structure, with potential short-term and long-term bonuses now soaring past 100% of base pay. They discuss why our low director fees are failing to compensate for rising liability, why New Zealand struggles to attract global talent, and the need for boards to abandon compensation surveys to reward extraordinary performance and asset return.
Dr. John Peebles is a highly experienced board director, governance consultant, and executive search advisor. In 2008, he was named one of the 50 most influential search consultants in the world by Business Week. His extensive board experience includes current roles as Chairman of Premier Lifestyle Villages Limited and past roles as a Director for The Broadcasting Corporation of New Zealand.
Dr. Peebles holds a Doctorate in Business and Administration from Massey University. His doctoral research focused on corporate governance, specifically investigating who determines the board's agenda in New Zealand's public companies. He found that directors often passively accept established agenda-setting systems, and his study suggests that competence and transparent boardroom processes are more critical to good governance than factors such as director independence, age, or gender.
#CEOPay, #DirectorRemuneration, #IncentiveDesign, #CorporateGovernance, #ExecutiveCompensation, #NZBusiness, #Leadership, #BoardMeetings, #Productivity, #Governance, #GovernanceBites

Transcript

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Hi, welcome to Governance Bites. My name's Mark Banicevich and my guest today, Dr. John Peebles, is making me do the introduction. So here I am. Thank you very much for your time, John. You're very welcome, Mark. John started his career actually as a journalist and then ultimately ran a recruitment firm and was very much involved in recruiting senior executives, board directors and chairs and so forth. So he has a very extensive governance background, and then moved into governance himself, is now the chair of a number of companies, or on the board of a number of companies, including a retirement village, a waste management firm; you're across a number of different industries. Has a PhD [Doctor of Philosophy] in governance, which we've covered in an earlier episode about power cliques on boards. Has written a book on governance, which is, in fact, right in front of me, "Parsley on Fish", and well worth a read. A nice, easy, digestible book with some great concepts in there. I think with the 26 different topics in here, we could easily do 26 different interviews. But I don't have that much of John's time. So today we're going to focus on something that has come through John's recruitment career and into your governance career, and that's around CEO [Chief Executive Officer] and director remuneration. Right. We get quite a bit of that. We would probably write, still for boards, half a dozen remuneration recommendations for top management teams, and probably a number of separate recommendations for board payment every year. And that gets us into the base payments, the movements, the economic situations, both here and globally, and then also particularly into incentives and the smorgasbord of things that falls off the end of those incentives because it can be quite extensive. Okay. Hi, today's topic on Governance Bites with Dr. John Peebles is around CEO [Chief Executive Officer] and Director of Remuneration. John, thank you very much for sharing your expertise and your time on this, because it is quite extensive. How would you describe the current state of Director and CEO remuneration in New Zealand? We're probably, because of scale and other things, we are probably at the lower end of director remuneration that you'd see if you looked at them globally. Sometimes you might see the figures, the base figures of what's paid being similar to an American company, but that wouldn't describe the other aspects of remuneration that are put in even for directors. We also have a unique situation that something like 40-odd percent of our boards are appointed by government, and therefore government has a real interest in not increasing director fees. In fact, one group I saw recently hadn't been increased since 2010, and then you listen to someone on the radio saying that the teachers need an increase of X percent, and look at these directors who have just been given 70%. Yes, they have, and they probably haven't been looked at for 20 years, which is probably not the same as the teachers. And so we tend to keep them fairly low. So your average director fee in New Zealand , according to one of the surveys, it's probably somewhere around about $51,000, $52,000. And if you look at a lot of our not-for-profits, they're probably free. The people do them gratis. Some of them would pay a small amount. We even get a blend, and I see them where people make a donation of part of their remuneration fee to the organisation, if it's a charitable organisation, and take only a portion of the assigned fee. We've done one of those recently. And there's not much in terms of incentives like shares or participation in the success of the business that falls to the directors. CEOs, somewhat different. CEOs of course are light here. We tend to look at things like our biggest company in the country, Fonterra, and say the guy gets whatever, how many millions of his things, four or six, or whatever it might be[$6.1 million in 2025]. I've lost track of where he is today. And they seem to think that's an enormous number. Now, it's not. One of the ones when I was at Stanford doing some study towards the PhD was, we were talking about a guy who had stolen money from his company and his base salary was $33 million. He'd stolen$600 million because he obviously felt he was deprived, and the balance, that was 24% of his total rem [remuneration]. So the rest of his rem, 75%, was made-up of short-term and long-term incentives. And there's a, you know, double pages of what you can do that would give that person something. What we've seen progressively is we've seen New Zealand, say, taking CEO, with the direct pay the salary being probably 74 to 81 percent of total remuneration and small amount on short-term incentives. We've seen in America that being 24%, 26% with a large amount on incentives. It's the American way. And then we're seeing now some changes that have gone on just in the last year actually, which have been very interesting. We picked up when we were doing two remuneration surveys earlier this year, and that was that we suddenly found with the COVID and the other restrictions that have gone on financially, the boards had moved to control the scale of the chief executive's base remuneration, so they'd crammed it down. The chief executive's response to that's pretty normal, "Well if we increase the profitability of the company,"what will you do for us?" And so we've seen an emphasis come back into the short term and the long term. Now we would have previously said that the CEO would get between 40% to 60% potential bonus on base salary, and short term incentive, and not a lot of long term, because our shares don't move much, whereas they do in America. However, what we've seen in recent years is a huge movement in that short-term incentive, and we've seen it this year up to as high as 90% of base, and we've seen the long-term incentives really rattle in. And some of them, I think we saw one this year up to 128% of base added on. So you had your base, your short-term and your long-term incentive. So we've seen in that case that one I was thinking of, I think the base, the total remuneration galloped from $650,000 a year to about $2.5 million. And so there was a very rapid movement. So we've moved more towards the American system, I think. But being a small country, our base salaries are lower. Mid-range, pretty similar. If you go into, say, a marketing manager, New Zealand , Australia, UK [United Kingdom] and US [United States], putting aside the currency differences, the ranges look similar. But the top end? No, it changes the top end. Right, that's really interesting. It's great to see more long-term incentives come into play into New Zealand. I remember a few years ago, in fact, when Adrian Orr first became Governor of the Reserve Bank, he presented at the Financial Services Council Conference, and his presentation was very much focused on how New Zealand incentives are driven more towards short-term, and we need to be thinking more long-term in our businesses, so it's quite significant. And he's dead right, because if you look at performance per capita, we're about $30,000 per head, against Singapore's $80,000. So we're way off on productivity. Yes. And so I think the thing that boards are struggling with, and certainly companies are struggling with, is how do we increase productivity? That doesn't mean people necessarily, it means getting more out of the people and the resource you've got. Yes, and not necessarily by flogging them for more hours, but being more efficient and more effective. No. Being more efficient in the way you handle it. Yes, right. You've talked about the difference between the New Zealand model and the US model, about how there are far more long-term incentives and how New Zealand is trending that way. What lessons, either positive or negative, can New Zealand take from the US experience with that executive compensation? I think actually we're going the right way. I think we'll see a transition through to where the base salary becomes a base salary. And it really is a base salary and there's a huge opportunity for incentives. I think one of the key executives who resigned in the US, or retired in the US about four or five years ago, was a very interesting case study. He had two associates who were senior men in the company who people assumed would get the role. And as it was the board went outside and appointed someone else, and the two key men left and went to different companies. Now when they went to different companies the price of the share went through the ceiling. So the movement of one man to another company, for example, raised the share value by about $20 billion or something just overnight because this was a guy who came from a strong company with a strong performance record and the shareholders responded immediately. Wow. Do you have any trouble attracting talent to New Zealand , given the difference in those salaries? Yes, we do. I mean, I remember doing one search a few years ago, which illustrated it very well, and we were looking for a chief executive of a very major corporation. We were offering about four million, so it was one of the big ones. And the approaches I made in the US, we had to target second and third tier executives. We couldn't afford to get at the first tier executives. And I remember very well my first morning, it was quite distressing. I had two guys I wanted to contact and the first guy I spoke to in the US said to me,"What's the salary?" I said, "We can pay about four million." He said, "So what about bonuses?" And I said,"Well, we don't have a very successful bonus scheme here, and it doesn't work like that and you might"get $50,000 or $60,000 if you're lucky." And he said,"Oh yes." And he said, "What about the shares?" And I said, "Well, now, shares don't move much"in New Zealand, they're pretty flat." And he said,"Look, I've got 17 million shares now and they're"escalating at 4 million a year. Unless you can cope"with that sort of thing, I'm out of here." So that took care of my first approach. And my second approach, which I made, I caught an executive who had retired to Ireland, and I wanted to really attract him back into New Zealand. He was very experienced, very good. And he said,"Look, I don't need this, John, really." We went through a discussion and I finally said to him, "Look, I know you got out of your last company when it was sold, and you probably took"some shares with you, did you. Can I be rude and ask how much you took?" He said, "I think it was about"US$97 million, John." He needed me like a hole in the head, and we don't have those sort of things. We would regard that as obscene in New Zealand, and it probably is, but again it depends on how much wealth is being created in the companies. And our companies are relatively small, so we don't create that wealth in a huge way. And you know, we talk of companies, our biggest company being a dairy company. I can't remember what the percentage is of global dairy production it does, but it's pretty tiny, which means if we went missing in action, we probably wouldn't be missed. Even if the price of dairy did rise slightly, it would be infinitesimal. So we're not really an impact-type company. We think of, you know, our big companies being $20-odd billion turnover. When you, it's more interesting when you're dealing with a company that, I wasn't, one of my first ones in New York that I dealt with US$650 billion turnover. I mean, it's somewhat different, and you realise suddenly the impact of what you're talking about. So they're big numbers. And the challenge around attracting the talent at executive level is it's an international pool, isn't it. You're competing on the international stage for the right talent. You are, but if you take it, you take the thing that really attracts people to the US , for example, and we're probably closer to the US than we are to Europe. We deal more with the US in terms of recruitment in my experience than we did originally. Originally we used to deal a lot out of Europe, with Britain or Holland [the Netherlands] or somewhere like that. Nowadays it's probably more the US. But if you look at the US because they're based on shares. Let's just take, say, a simple example. You might have gone and joined, say, Rocket Lab, when it was launched. Which came from New Zealand, of course, but there it is launching on the US exchange at US$20 share, and the share price collapsed I think to about $1.38. And everyone said,"Gosh, that's ghastly." But you'd probably, if you'd had a few thousand of those, and been attracted in there as a key executive. Okay, so you've got those shares. What's going to happen to your share? Well the last time I looked, yesterday, it was US$65, so you'd be worth a few $100,000, wouldn't you, on your shares. And that's what happens. Their market moves, it's much more volatile. It moves more quickly now. As we're used to saying that, if you were in a wheelchair without brakes on the New Zealand Stock Exchange, you wouldn't go anywhere in a hurry, whereas in America you'd be killed overnight, because it goes up and down. And there's a big incentive, and the incentive is concentrated on the value that you create for the company. I think we'll move more that way in New Zealand as we try to get our productivity up. Yes, part of the challenge there, we've got a very thin market, haven't we. We've only got 113, I think, odd companies on the NZX [New Zealand Exchange] right now. Right. And you try and find ones where they've got a billion plus turnover. It's pretty thin. Yeah, absolutely, yes. Yeah, there's a reason we have an NZX 10 [index], not an S&P [Standard & Poor's] 500 [index]. Correct. And if you go looking for the executives who earn over a million dollars, you get pretty thin pretty quickly. Yes. There's not that many of them. Yeah, right. And as you say, you're competing with people paying $100 million. Well, there's quite a lot of them in private companies. You'll get private companies that in many cases will pay better than publicly listed companies. There's a myth that publicly listed companies pay better than other things. They don't necessarily. The share deals and the bonuses that we would see with top performing private companies would outdo some of the publicly listeds. You mentioned earlier about the remuneration structure and how for CEOs traditionally in New Zealand that's been salary and a small amount really of short-term incentives. Right. In some cases we are moving towards a larger portion of short-term incentives and also large, almost a third, a third, a third in the example you gave me earlier of short-term, long-term and base salary. Where do you think the portionality of those different structures is in New Zealand? What portion do you think of New Zealand salaries are still mostly base salary with a little bit of short-term incentives, and how many are moving more? Mostly, I would say. I'd still think it's probably 70% or 80%. I've never studied it, but 70% or 80%, I suspect, is still base salary and short-term incentive. And the last time I looked at what the average short-term incentive was in New Zealand for a CEO, it came out at about 16% on average. So it was pretty average. Yes. Whereas you'll get some innovative companies. I mean Lion [Nathan], certainly at the time when Kevin Roberts and Joe McCollum were involved in the early days under Douglas Myers they went really in a big way towards incentives and their performance showed it. Right. So it was quite different. They turned that company around, but it wasn't unusual to see very significant short-term and long-term incentives, which can be taken either in cash or in shares. Okay. And what about director remuneration? Director remuneration just staggers on. And it tends to be dominated by CPI [Consumer Price Index] and what the other movements are. I mean we even saw one strange one this year where the Institute of Directors commented that the average director fee went down, not up. Now, it was also the first year they added in not-for-profits, and a lot of not-for-profits profits pay next to nothing. Yes. It's quite misleading to do that, because that would have influenced the overall picture on the thing. But you don't get big movements. If you think of an average director salary being or director fee being $50-odd thousand. And the interesting thing about that is you're expecting these people to work now about 170, I don't know how many days they'd be involved, but they'd be involved quite a number of days a year. Yes. And it's getting more onerous and there's more regulatory control. Greater liability. Yeah, and much greater liability and much better chance of finishing up in court. And what are you paying for? You're paying for their time and expertise, and yet that doesn't represent the hourly rate. No. So the fees are poor, is the best way of putting it. In publicly listed companies, they're more realistic, but they're still not over the top. And they don't tend to have the incentives either, yet they're the body that are ultimately responsible for performance. Correct. Wow, that's really interesting. You've talked a little bit about the evolution of those incentives, and in particular one of the hand brakes on the long-term incentives being the relatively flat New Zealand share market. Right. Are there any other reasons for that evolution? Not immediately apparent. I think what we're seeing though is the boards gradually turning more and more towards performance. And we're looking at an overall performance of a company, and we're accepting that the chief executive is going to get that. If you talk to the senior executive of many companies here, they would say,"We didn't get our bonuses this year," you know,"We didn't get the maximum bonus this year." Well, they're still running business as usual. Okay. What we're saying is business extraordinary that's what bonuses are for, and if you want long-term incentive and you want bonus, you should be driving extraordinary performance. Right. And we've got a complacency about,"Hey, the bonus should be there if we just do business as usual," or, "We just hit the targets." Well, we want you to blow the targets away. Right, yes. So in summary of where we are so far, if you take your executives, particularly a CEO as the key executive position we're talking about, traditionally a base salary package, short-term incentives of maybe 16% of salary. Some innovative companies moving more towards a US model that may be around a third base salary, a third short-term incentives, and a third long-term incentives, which may be a combination of cash and shares. But in the director space, very much still a fixed director fee of around $50,000 or zero if you're in a not-for-profit. There are some companies that arrange share purchases, or you can purchase, or they might say, "If you're going to be a director, you must hold so many shares, and we will arrange"for your share purchase, or provide you with an interest-free loan, or you'll earn it out of X"and you'll take this fee instead of that, and this is what you'll get." We do get those. And in private companies we get a somewhat different system where we'll get someone coming in with a promise of a shareholding. Right. Or an actual shareholding. So, "If you do X, you will finish up with so many shares." And that does give, in fact, you'd probably see it in more private companies than you would in the public companies. So we're seeing more innovation in terms of director remuneration in the public sector, sorry, in privately-held companies - In the private sector. - than we are in publicly-listed companies. I think that's always been the case, yeah. Okay, that's interesting. Is there evidence that the remuneration structures are driving better performance? None. Okay. I mean, it seems a terrible thing to say that, you know, if you sit back and say, what are the outstanding performance companies in this country? If you put those on, I mean, how many could you think of off the top of your head? Which are the ones that blow it away? Which are the ones you'd say, "Gee whiz, these companies are extraordinary." Now, if I was to do that and you were to put them in categories like cooperatives, publicly listed and privates, the ones that I could think of would be in private. Yes. And they wouldn't be in the others. Now, sometimes there's the odd - There's the odd exception. - there's always the odd good company that fits in there, but if you look at some of those companies that we would see on our stock exchange, their performance is pretty ordinary. And also I think some of the listed companies from New Zealand that are doing very well aren't listed here. No, they're not. They're on the ASX [Australian Securities Exchange] or the Nasdaq [US] exchange. Well, Rocket Lab, we talked about earlier on, would be a good example. Xero another one. Yeah, it would be. And there would be a number of those companies who would seek listing elsewhere. And that's also because they would require bigger capital than they would find access to in New Zealand. So it's in their interest to move it off shore. It increases the access to capital. Yes, yes, absolutely. What risks do poorly designed pay structures create? Both for the strategy, the culture, the risk appetite of a business? A lot of things aren't designed at all. They're just, what does the market play? I'm going to stick a finger in the ground and say this is what you get paid. I'm involved in some of the work we've actually gone away from talking about structures of bonus short-term. Because we're not happy with the business as usual approach. I'm certainly not. And so what I've said is, "Okay, bonuses will be at the discretion of the board." So that gives me the complete freedom to say to the board, look, this person has done something extraordinary. I want to double his payout. Or this person hasn't done anything. I'd rather he just went away somewhere. You don't really need him. But I think we don't have well-designed structures. There's an increasing group of people who turn to remuneration surveys to look at what goes on, but their concentration is often on what's the base, what's the medium, what's the higher quartile, where should we be positioned, are we in the right place? Yes. Rather than saying, "Why are we doing this?" I mean, why are we looking at a survey, when really what we should be saying is, "What result do we want?" Yes. It's not a survey that's going to determine that, here's the result out here, we can pay him whatever we like, but just give him X and he can live on that, and by the way, if he gets that, We'll pay him. Yes, right. I would expect that if you've got, particularly if you've got some incentives for directors, I would expect to see a higher risk appetite. Is that what you'd see? Because you'd then be trying to have a company that would, as you say, shoot the results out of the park. Yes. To do that, you've got to take a bit more risk. Well, all business is about risk. I remember sitting in a conference in Sydney a few years ago and one of Australia's top directors, who I admired hugely, had listened all day to being criticised about the performance of companies and he said, "Look, I'm just"a non-executive director who goes along with these top companies. In spite of the fact"I see the companies, I work on them and I study them and I walk around them," which many directors don't, "and I understand them or try to understand them."I consider making a decision at the board table and I look back a month later and think,"'Maybe only two-thirds of those decisions were right.'" And then he said, "I look back six months later. Maybe only a third of those decisions, when look back." He said, "I don't want to look any further. I might not have made a correct decision at all." So as he said, "unless you're in the business running it,"you can set the parameters for the team, but you've got to have a team who can pick it up"and actually perform to those parameters." Yes. So what you're trying to do in all of that stuff is set targets and goals and then make it easy for those people in the top management team to actually achieve the goals. So it's again a bit like the [Nelson] Mandela leadership, I'm leading from behind. I'm telling you this is what I want out of it. You're telling me how you're going to get there. Yes. Okay. Yes, right. If we take then, and you've alluded some of this already, you may reiterate what you said, which will be fine. But let's take a green fields approach. As you say, rather than looking at the survey and saying what does everyone else pay, if you could redesign director, let's take director remuneration first, from scratch for New Zealand companies, what would you do differently than saying, "Here's 50 grand"? I'd probably say, "Here's 50 grand as your base salary. Now show me what you're going to do"with the shareholders' money. And if you can get a return of 20% on the shareholders' money,"I might look at you more favorably than if you got a temporary return of 12%." And I'd work on that basis. So, what are we going to get to it? And then I'd also be saying,"And I expect you as part of that to think about the community you're operating in, so why don't we"give two percent of our profits back to the community in some form." So I've redesigned it in a different way altogether, because I don't think, I can only think of a couple of companies really that are genuinely in the business of giving back significantly to their communities, the communities they operate in. Yes. Yeah, right. And so you've got that, you've got that community that permits us to work, and then you've got, let's get the goals that the shareholder wants and get an extraordinary return, and let's reward you on the extraordinary return. In the meantime, you can live on why. Yeah, right. And with that, what would your split of short-term and long-term incentives be out of that? I'd have it done. That's interesting one, because if you get your incentive, what's the point in going further? So why would you put a cap on it? What I'm asking though, is you talk 12-20%, how much of that performance bonus would be, or whether it's shares or whatever it may be, would be for performance over the next one to two years and how much of it would be the longer term? Well, you still distinguish between your short term being generally a year and your longer term being beyond that, but if you were to take a business and say its average in the country was to return say 12% on its asset value - because I look tend to look at asset return on asset. Yes. That's the only thing. You can't muck with return on assets. Doesn't matter about tax, doesn't matter whether it's private or public, you cannot muck with return on assets. Leverage doesn't matter. Doesn't matter. So if I was looking at 12% return on average, being the average, and someone produced 24%, I'd probably say, "Wow, let's give this guy something that makes him get 36% next year. Why don't we?" But why would we put a cap on it. Yes. So let's open it up so that he can get recognition for the amount he put in. We had one company we were dealing with a few years ago, where the European owners who had purchased it wanted to get rid of one of the top performers. And they said to the MD [Managing Director],"He's paid far too much money." And the MD would say, "He is this company."He's the guy that generates all our business. If you want to get rid of him, I'm going."And by the way, why would you want to cap it? He's the guy who generates your revenue,"for goodness sake." So he got an extraordinary amount. I think about, he earned about four times what the chief executive earned. Wow. But he brought all the business in the door. So why not? Yes. The people who will do that, and you know, it's so funny, we put a person into a business It happens in professional businesses and companies. We put a person into a professional business many years ago. He had seven staff he took over and a fee base of about $70,000. He drove it to about $15 million, I think, with 70 odd people. And then the international people wanted to put him onto a bigger scale and get him to grow the business internationally. And the local people, who had some say in it, said "No, no. He's doing well enough"where he is and we want to keep him here, and we don't want to disturb the thing." And he said,"Well go to pop, and I'm going internationally. And I'll go anyway."And if you don't want me, I'll go somewhere else." Yeah, absolutely. Because he could generate so much money for people, why shouldn't he be rewarded? Yes. We have a strange thing about how much someone should get. And that's a common thing on the street, you know,"He gets too much money. How much should he get?" I mean, that's a bit like the American saying, isn't it, where the car drives past the corner and splashes the puddle, and the water comes up on you, it's a very extravagant car. And the guy standing at the traffic lights, who's pretty ordinary thinking, says, "That bastard. He's just splashed me." And the guy standing alongside him and thinks like an American says,"I'm going to drive a car like that one day." And so we don't think about it the right way. Yes. We need to change. And that's a board thing. We need to change the way we think about the incentives, if we want to promote incentives. Great. John, thank you. I've got one question for you that's more general. What advice would you give to a new director? Listen. Don't talk too much - not like me. And pick up from the guys, work closely with the guys that you think really know what they're doing. And find a couple of people who can mentor you, or who you can bounce things against in confidence. You know, there's one lovely little thing I have once, one of the board minutes I get, I get all the minutes, I get all the papers through a particular thing on the computer. And one of my fellow directors writes all his questions. He's particularly good in one aspect, in financials, and he writes all his questions and points things out. When I go to financials, I go straight through to see what he's focused on, because what he's focused on is something I should be looking at. Right. I'll read them, but I want to see what he's focused on. You're getting the hints from him. Well, he's very competent, and he gets it like that, and so I want to see where he's going. Great. That's a nice feature of the software. It is, isn't it? In fact, for a young director, if you can get that sort of software, it's great. Because you can see where all the other directors have actually been putting their queries or scoring something. I write mine in shorthand so no one else can read them. Being an ex-journalist, I had shorthand. I write mine in shorthand and everyone complains that they can't read them. They know where I'm pointing, but they can't read what I'm saying. Not a lot of people would have that skill anymore. No they don't. Not many. John, thank you very much again for your time. It's been an absolute honour to spend time with you. I appreciate it. Very welcome, Mark. Have a good day. Yeah, you too. I'll look forward to seeing you again soon, and to seeing you next episode. Thank you for watching this episode of Governance Bites. We have more episodes on YouTube and your favourite podcast channel, where I interview directors and experts on various topics relating to boards of directors and governance. We'd love to see you back, and please like, subscribe and share the videos and podcasts.