Tenure may have a surprising influence on an executive’s performance focus, particularly at the CEO level. The tenure of Australian CEOs is less than most other Western countries. Based on turnover rates in GuerdonData™ over the past two years, the likely tenure for an Australian based CEO is 4.5 years. This is not much better for reporting executives, with the likely tenure of a CFO being 4.7 years. This is stated in the figure below, with turnover shown on the left hand scale, and the tenure this translates into on the right hand scale.
An experienced senior executive may not know the exact statistics, but they have been around long enough to know the probable time frame. For the CEO in particular the tenure issue is exacerbated by the additional probability that the role is likely to be the last full time career position the CEO will have.
So, when many CEOs leave, they “retire”. Given that their average age is 52 they need to have relatively larger retirement savings in place in proportion to career earnings. Hence, the CEO role is the last opportunity to maximise career earnings for a retirement nest egg. The latest Booz Allen study on CEO turnover put “forced succession” as a reason for 36% of all turnover. So Australian CEOs may be forgiven to an extent if they seem to “make hay while the sun shines”. Board remuneration committees that understand this have a better chance of constructing a remuneration package that delivers real prospects of an enhanced retirement nest egg conditional on shareholders’ interests being significantly bettered during the CEO’s tenure.
So what does an Australian CEO, with a likely five year tenure, do to maximise earnings in his/her last full time career role? Obviously there are many factors at play here, but let us assume that the CEO is in receipt of the average ASX 300 pay mix. This is illustrated in the pie chart and histogram below.
The data would seem to indicate that short term incentives and long term incentives are balanced, and invite equal attention. But the smart CEO (and in our experience, that is a feature they all have in common) knows enough about the statistics of tenure to count the likely rewards for a five and a bit year tenure, i.e.:
• Five years of STI at 85% of fixed pay per annum totals 425% of fixed pay, while
• Three years of LTI at 87% of fixed pay per annum totals 261% of fixed pay.
Note, we have used three years for LTI assuming an annual grant fully vests at the end of years three, four, and five.
So, on this basis alone, it pays the average CEO to focus more on short term results because it pays more over his/her tenure.