The boardroom ‘hustle’

Top CEO salaries revealed and the growing gulf with their workers

The Equal Employment Opportunities Commissioner has highlighted the ‘‘huge difference’’ between executive and worker pay, and questions whether the disparity reflects the country’s values.

A Sunday Star-Times survey of the biggest 20 companies in the benchmark NZX 50 index found only half were willing to disclose their median pay, a measure that must be published in other overseas jurisdictions such as the United States.

The survey found chief executive pay, including benefits and incentives granted for the year, was between 16 and 40 times worker pay.

Fletcher Building, whose chief executive Ross Taylor had the highest pay packet of $7 million, didn’t disclose its median pay level. If it were consistent with the survey’s mean median pay of about $78,000, Taylor’s salary package would be 90 times that of his workers.

Equal Employment Opportunities Commissioner Saunoamaali’i Dr Karanina Sumeo says the survey ratios were ‘‘significant’’.

‘‘It does show the huge difference between those at the executive level and the rest of the workers,’’ she says. ‘‘It makes me think about our values as New Zealanders.’’

Sumeo questions whether the disparity is ‘‘fair’’ when many people were not able to provide basic needs for their families and fought to get paid the living wage, a measure designed to reflect the true cost of living in New Zealand.

‘‘There’s a struggle just to get the living wage,’’ she says. ‘‘And yet we look at the people here in the top tier, and they are just in another universe really.

‘‘When you look at this disparity, and we think about our goals of inclusion and fairness and equality, it just doesn’t seem right.’’

Research by the University of Otago published in 2017 found the gap between chief executive compensation and worker income was widening.

The longitudinal study by Helen Roberts from the Department of Accountancy and Finance showed New Zealand chief executive compensation had increased almost five times faster than worker income in New Zealand.

Tim Hazledine, a recently retired economics professor from Auckland University business school, says the pay gap has been widening across the English-speaking world as an explosion in top pay benefited executives.

Hazledine says he isn’t aware of any studies linking the higher chief executive pay to increased production. Rather, he says, the explanation is probably due to globalisation which has increased the bargaining power of executives and reduced the power of wage and salary workers.

‘‘The salaries have gone up because they found they could hustle more money and the board would give it to them, so why not?’’

That’s been the experience of Rob Campbell, a former union official turned professional director, who says that after many years on corporate boards, the constant pleadings of senior executives about ‘‘fairness’’ in their remuneration was ‘‘the most dispiriting and soul-destroying part of the job’’.

‘‘They, in great majority, address the issues of their own pay with a passion that would make an old-time cloth-cap union official blush (or sick),’’ he says.

Campbell says the issue for him was not so much the size of the chief executive salaries, although he personally did not see much of a case for some of the very highest, and by any measure the multiples compared with worker pay were ‘‘large’’.

He says he is more concerned about the persistence of pay rates at lower levels which were inadequate to maintain reasonable standards of living, partly due to low productivity, lack of productivity growth, and a tendency to believe that the country is more wealthy and more equal than it really is.

‘‘Overlaying that is a mistaken belief system in business and governance leaders that their relative levels of pay are based on merit or intrinsic worth.’’ Campbell says there is an excessive focus on incentive rewards in senior executive remuneration.

‘‘They tend to reinforce selfinterest at the top, just where more humility is most needed,’’ he says.

It also overemphasises the importance of shareholders rather than other groups that have an interest in the company, such as workers, and the real contribution of senior individuals, he says.

‘‘They waste too much time, money and effort calculating, revising and comparing the incentive schemes between businesses to the sole benefit of consultant advisers and the senior executives who hire them,’’ Campbell says.

The professional directors’ body, the Institute of Directors, has advised boards that they can expect more scrutiny and debate about executive pay and income disparities as part of greater transparency around social expectations, says chief executive Kirsten Patterson.

‘‘This is definitely an issue that boards are focused on,’’ she says. ‘‘It’s something that organisations are acutely aware of, and I think this is going to be a trend that we will see more of, that expectation around transparency.’’

Still, Patterson does not support mandatory reporting of the median wage, as happens in the US.

She says median wage ratios across industries may not be comparable, as high salaries in the knowledge industry may provide a better-looking ratio than for a large service organisation where salaries were lower.

‘‘We are conscious that there is a lot of reporting already on boards and whether that measure is the right one for all boards will need to be determined by each board. So we are not in support of increased reporting for boards, but we do encourage them to be sharing the appropriate remuneration information that is the right marker for their organisation and for their industry,’’ Patterson says.

She declined to comment on whether the ratios in the Sunday Star-Times survey looked appropriate but agrees the gap between executive and worker pay has widened.

‘‘Some of that comes about through organisations as they grow,’’ she says. ‘‘As they become larger, then often you will get a shift in that because of the complexity of the CEO role, or the number of layers between a CEO and an entry level position will start to increase.’’

Boards were focused on the war for talent and how they could attract and retain staff at every layer of their organisation, including how they appropriately remunerate their people, she says.

‘‘There is a global market for CEOs just as there is a global market for a number of roles and attracting talent is really critical if we want our organisations to thrive.’’

One of the challenges in New Zealand is that it is largely made up of small-to-medium enterprises, and the disparity between that and a large corporate could seem like a lot, she says.

However, she says there is closer alignment between executive and worker pay in New Zealand than overseas.

‘‘When we compare particularly to our Australian colleagues, for which there is a very close market, the New Zealand CEOs are not receiving Australian-level remuneration, so it’s a

‘‘They found they could hustle more money and the board would give it to them, so why not?’’ Tim Hazledine Former economics professor

‘‘There is a global market for CEOs just as there is a global market for a number of roles and attracting talent is really critical if we want our organisations to thrive.’’ Kirsten Patterson Institute of Directors chief executive

hard assessment about what fairness is,’’ she says.

Hazledine says boards are probably worried that if they don’t pay their chief executive as much as other chief executives, they won’t be able to hire such a good chief executive. On the other hand, a flatter pay structure might better promote teamwork and morale, with workers feeling that they ‘‘are in the same boat as the boss’’, he says.

Patterson notes that many executives took pay cuts during the first Covid-19 lockdown last year, recognising that they were in a privileged position because of their higher remuneration levels. In the coming year executives may sacrifice their own pay increases to enable them to recruit and retain staff during a time of labour shortages and wage inflation, she says.

‘‘We are seeing wage inflation pressure across a range of industries and a range of organisation types,’’ she says. ‘‘This is going to be a really critical issue for all organisations.’’

The equal employment opportunities commissioner is also thinking about changes that are happening during the Covid-19 pandemic, and she believes a moment of crisis like this enables you to see things more clearly, and want to do things better.

‘‘I think the time for equity and the time for inclusion is now,’’ Sumeo says. ‘‘I like to think that we don’t need to follow overseas trends, that we can be creative and do what’s right for ourselves.

‘‘We have to create the country that we want our kids and our grandchildren to grow up in.’’

Sumeo is concerned that there is a growing acceptance of the huge inequity between people struggling on the minimum wage and ‘‘bizarre salaries’’ at the top.

‘‘It’s not the sort of rhetoric you want for our country, for that gap to be increasing,’’ she says. ‘‘It’s almost like we’re becoming more comfortable with the gap, which is not something that we would like for our country.’’

That denotes a cultural shift in how we see each other, how we value work, and how we value our people, she says.

Sumeo is pushing for the introduction of pay transparency legislation and would like companies to be required to report median pay so that it can be used as a benchmark to measure pay inequities.

‘‘It doesn’t matter if it’s embarrassingly crazy,’’ she says. ‘‘The thing is when you measure it, then you can start addressing it and looking at the inequities.

‘‘But if you never record it, or you don’t want to see it, then it signals a problem with the leadership at board level if they’re uncomfortable to do that. And we do expect more from our leaders. It’s really not that hard.’’