CEO and Board Remunerations – Have we got them right?
Dramatic increases in CEO compensation packages, coupled with a series of corporate failures have reinvigorated the attention to governance structures and practices that promote efficiency and transparency. A current concern relates to the setting and control of a CEO's compensation packages which often appear excessive. Another concern derives as an outcome from investigations into corporate failures reinforces that it is the directors/trustees who are usually the ones called to account through our Justice System for any failure or wrongdoing.
These concerns suggest the accountability-responsibility divide continues to be blurred. Is it therefore time to consider the level of accountability compared to responsibility when compensation packages are under review? .
Surely a question that needs to be asked is: what is a fair base for a remuneration package for someone who is the responsible for an organisation's overall performance as directed by his/her Board, compared to those who carry the overall accountability? We all expect that a CEO is appointed because he/she has the ability to lead and motivate people, understand the role is to work for the betterment of the stakeholders that the organisation serves, and possesses well advanced competencies in managing budgets, processes and risk. If not, then the question that should be asked is: why was he/she appointed in the first place. Likewise board members should be appointed on their ability to bring diversity of thinking to the board table.
Research suggests that the CEO's compensation package is often view as being excessive by shareholders when the package offered does not reflect or align with the return the organisation is generating for shareholders. For instance, Brenner and Schwalbach (2009), highlighted that during the decade 1995 to 2005, CEO compensation in both the US and UK more than doubled even though the average annual growth rate of business was only 9%.
Trends in Australia reflect the similar pattern, with an appreciable rise in CEO pay of, on average, US$708,000 in 2005, up from US$377,000 in 1995, at a time when the annual growth rate increased only by 7%. The situation in New Zealand follows: we have, for several years, seen some CEO compensation packages rising at a time when the organisation is experiencing decreasing returns or when restrains are being placed on compensation of people working within that organisation. Similarly, in the case of Central and Local Government, when, in the eyes of many ratepayers and taxpayers, the rises do not reflect improved service delivery.
Naturally the actual percentage and dollar amounts that are published create speculation and debate. We personally find it interesting how some organisation can justify paying any one person more than $1m per year in compensation, given that such recipients are reliant on others in their senior management teams and their board members to support and challenging their thinking in the role.
In acknowledging that CEOs are not always board members but can be "Deemed Directors" under the Companies Act (1993) pivotal to the remuneration packages are:
- What real value, over and above that expected on him/her in the role, has the CEO been able to deliver to his/her shareholders/stakeholders during the period under review and while that person is in charge?
- What is the real value and limitations of the managerial skills and abilities that any one person can bring to such a role?
- Should ultimate accountability be reflected in compensation packages?
- Should remuneration increases be reality fair across the organisation and relative to the return to the shareholders.
Given the Governance evolution that has been quietly occurring behind the scenes placing the accountability at the feet of directors, is it not time for directors (the 'can' carriers)- the people who are ultimately held to account to be remunerated fairly while at the same time the CEO salary package is put into perspective as the overseer of the organisation's processes, procedures and key strategic initiatives as directed by his/her board.
In spite of the accountability that goes with a director's role you could just imagine the uproar if directors fees were similarly increased in line with the extra accountabilities they hold which suggests the ultimate accountability that directors take on when they accept a directorship is now fully understood.