Similar in standing to Guerdon Associates in Australia, dsd Consulting Ltd is the preeminent New Zealand firm with an executive remuneration focus.  On the publication of their “CEO & Top Tier Executive Report 2012” report, we asked our associates at dsd to provide a summary of the New Zealand market trends.  Their summary and insights are below. 

 

Unlike Australia, New Zealand to date has remained relatively silent on the mandatory disclosure of executive remuneration in annual reports.  The current requirement is for companies to publish details of executive remuneration exceeding $100,000 within brackets, although the breakdown of the actual value and how remuneration is structured is not required.  

 

NZ’s reluctance to enforce transparency in executive remuneration is in direct contrast to Australia and indeed other jurisdictions who have implemented a range of prescriptive legislation in light of the GFC.   NZ’s ownership structures, a long history of scepticism about the value of regulation and the rather conservative nature of executive remuneration practice are key factors behind this.  

 

There are signs however that the NZ landscape is changing with the passage of the Financial Markets Conduct Bill currently before Select Committee that proposes a modified liability framework for egregious securities law breaches of directors’ duties.  Penalties include up to 10 years imprisonment and fines of up to $1million for individuals and $5million for companies.  This is the first major step in recent years towards a stronger focus on director accountability.

 

Regardless of NZ’s legislation it should be noted that a number of NZ’s largest organisations are listed on the ASX or have parents or subsidiaries operating in the Australian market, therefore most commentators believe it is just a matter of time before these practices are adopted to some degree in New Zealand as part of good business practice. 

 

Key Trends in New Zealand Executive Remuneration

 

Short- Term Incentives

 

The dsd Consulting Ltd: CEO & Top Tier Executive Report 2012 which surveyed NZ’s largest top 50 companies highlighted that 95% of organisations operate some form of short-term variable pay scheme.

 

STI payments in 2012 indicate a gradual return to health, with an increase in the quantum of STI payments of approximately 31% overall in 2012 from that reported in 2011.  The number receiving an STI payment also grew by 9% on 2011.

 

Financial performance remains the key driver for the majority of STI schemes with EBITDA the most prevalent financial measure in most schemes with the remaining measures a balance between non-financial quantitative and qualitative measures.

 

At the median, where the maximum level of over-performance is achieved, participants can earn up to 150% of their on-target opportunity.  Only 9% of organisations have the target incentives as the maximum that can be earned under the scheme.

 

Reviewing short-term variable pay schemes remains a key focus for many organisations.  68% of organisations in dsd’s CEO & Top Tier Executive Remuneration Report have recently reviewed or are currently reviewing their STI scheme.  This is an increase of over 50% reported in 2011.   Most of these organisations are seeking to fine-tune their performance measures and reviewing alternative and more effective scheme/plan designs.

 

As there is no mandatory requirement for deferrals in NZ, the incidence of deferred STI payments is relatively infrequent with only a small number of organisations incorporating a deferred payment component into their schemes.  Unsurprisingly, where deferrals do occur these are predominantly within the financial services sector.

 

Long-Term Incentive (LTI) Plans

 

Only 54% of organisations have an LTI plan for CEOs and Executives.   Sixty-seven percent of these are publicly listed companies and 29% are privately owned enterprises.  As a large proportion of NZ organisations are privately owned, these statistics reflect NZ’s market environment.

 

Where plans are in place for publicly listed organisations, performance shares remains the most common plan operated (45%), followed by share options.  Cash-based LTIs (not linked to share price) are most common in private organisations and represent the biggest trend in LTIs in recent times increasing from 5% in 2010, to 21% in 2011 and to 29% in 2012.

 

The most common performance measures applied to LTI equity plans is Relative TSR with 86% of organisations using this measure within their plan. 

 

Of the organisations currently operating an LTI plan, 67% indicated that they have recently reviewed or are planning to review their LTI plans.  This signals that the majority of organisations are realigning their plans to current market conditions.

 

Fixed Pay Increases – Actual and Forecast

 

Actual median salary increases for CEOs and Executives in 2011/2012 were 3.0%.  In addition, increases for the coming year are forecasted at 3.0%.   Approximately 22% of organisations made zero increases to their CEOs’ fied pay during the last year but no organisation plans a zero increase in the coming year.

 

An analysis of the same incumbent Total Fixed Remuneration (TFR) movement for 2012 is an increase by 5.2% overall, a figure significantly higher than reported by participants as the market movement (3.0%), but still significantly lower than the same incumbent movement (7.2%) reported in 2011.

Diversity Practice – Boards and Executive Teams

Research on the diversity of executive teams in surveyed organisations shows that female participation rate in leadership roles within NZ’s largest private sector organisations is approximately 15%.

 

Until recently, New Zealand has remained largely silent on the gender diversity issue.  However, that all changed in June 2012 when the NZ Prime Minister launched a new initiative called The 25 Percent Group.  The remit is to achieve 25% female participation on Boards by 2015.  The initiative is spearheaded by a group of NZ Directors and CEOs who are charged with actively lifting female representation on Boards both within their own companies and NZ as a whole. 

 

The 25 Percent Group initiative was followed on 4^th July 2012 by the NZX announcing the introduction of a diversity listing rule (subject to FMA approval).  The diversity rule will require listed issuers to provide:

·             A breakdown of the gender composition of their Directors and Officers, and

·             If they have a formal diversity policy, provide an evaluation of their performance with respect to that policy.

 

Although New Zealand’s response falls well short of Australia, it is likely that many of NZ’s largest organisations who are also ASX listed companies will take a more proactive stance to diversity practice over time.   This assertion is supported by research conducted by dsd Consulting into gender diversity where nine ASX listed NZ organisations reported putting in place specific diversity policies and reporting enhancements to comply with Australian requirements.  

 

Information on  dsd Consulting Ltd, and their “CEO & Top Tier Executive Report 2012”  can be found HERE.

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