(article published in Business Spectator)

Excerpt from Original Article

Speaking about the often negative correlation between salary packages and company performance, principal at Executive Pay Systems Greg Brogan tells Business Spectator's James Frost that:

·         The performance of executives does not improve when equity is included in remuneration

·         Non-executive directors are paid out from a pool of funds that are rarely performance linked

·         Full year results will show whether packages are coming back into line with weaker conditions

James Frost: What can you tell us about the correlation between executive pay and performance?

Greg Brogan: We maintain a database whereby we go back and we look at about nine different performance indicators. We look at how far they increase or decrease over time and then we compare that with the increase or decrease in executive pay over the same period. So, it’s a very simple, but it’s effective. Indeed most of the correlation we describe as negative.

JF: Does performance improve when there’s a significant amount of equity is included as part of the package?

GB: We haven’t discovered any correlation between performance improvement and the type of remuneration that a company uses. We have all different combinations of remuneration types and the correlation is fairly … well … static.

JF: What about other members of the executive team, the chairperson and non-executive directors?

GB: No. We don’t track that, but I can tell you that most of the companies we look at which are the Top 200, the non-executive directors ask the shareholders to approve the total spend on all of the directors and then they distribute that as they see fit. They don’t actually ask for permission to award a particular non-executive director, a particular sum. And the secondly, we haven’t seen any examples of where non-executive director’s fees are performance based, so it’s just a straight directors’ fee pool which is then paid out as directors’ fees.

JF: Greg, what are your ideas about how executive pay can be structured, so that they’re not paid extravagantly for non performance?

GB: The point is that over that period that we’ve looked at, boards have paid more attention to market data than they have paid to the performance data that they’re given in relation to the company. So, they know about how the company’s performing, but they then secure advice on market data, they take a position in relation to the market; that is, we need to pay at the 50th percentile and then they pay to that and I’ve seen many examples of where they set the STI or short term incentive expectation with respect to the market data as opposed to the performance data and that’s where a lot of this has gone wrong.

Now, what they need to do is have a very solid link to some very simple performance indicators, tell the shareholders in advance that that’s what they’re going to do, so that what they’re in fact asking for approval for is the connection between the performance next year and the remuneration that they’re going to pay. As opposed to what they do now which is say, well, we’ve decided to pay these executives X, some of which is performance based, we’ve already paid it to them, will you please approve it? I mean it’s a nonsense.

JF: To what extent is that complicated by a down market like we’re in now when executives who are doing a good job might be just minimising losses rather than making gains and profits?

GB: It is no difficult matter to identify the performance measure and target that you want to achieve and disclose them in advance and then pay to them. That may be that your performance target is to reduce the loss that you otherwise would’ve made and you can define that. There’s nothing wrong with that and there’s nothing wrong with paying to it, but they don’t do it.

JF: Equity markets have been weaker for more than year now and the economy has been slowing for almost that long. When could we expect to see this reflected in remuneration packages?

GB: Well, I’m very keen to see the 2009 results. I’ll be able to answer the question better then. You know the tail end of 2008 was the beginning of the global financial crisis and we’ve already seen at least a dozen examples of significant short term incentive payment where it’s been known that everything is clearly heading in the wrong direction, but they still pay the STI with respect to the profits that were made in the first half of the second half or indeed in the first half. So, I expect to see some sort of change in 2009, but I haven’t seen any or I haven’t seen much evidence of it in the 2008 data.

JF: You’re on record as being against putting in place further regulations to rein in executive pay. Can you elaborate on that?

GB: If the board paid executives against the performance of the company and they got approval from the shareholders to do it, whether it’s binding or not, then there would be no need to regulate because their pay would automatically come down. This is a story about leadership. This is a story about boards doing a job that the shareholders are paying them to do. To supplant that role, to say that we’re going to ignore the board and ignore the shareholders and regulate instead … there’s just no need if the board is doing its job. This is about doing things properly, not about doing things differently.

JF: Boards are presumably going to employ consultants to advise on these matters, what evidence is there of consultant shopping?

GB: I think there was some of that going on at the peak of the boom, I would never say that the data the boards have been getting is wrong, the data is what it is. You ask the consultant to tell what the CEO of a similar sized company in this sector is being paid and they’ll tell you. The board then says that we’ve got to pay at least in the middle of that market and maybe even a little bit more and so you get a ratcheting effect happening all the way up though because nobody says I’ll pay at the bottom of the market.