Pay for performance pays off

Pay for performance pays off

Organisations need to increase their use of incentive pay, says Moyle Consulting director Jarrod Moyle.

Moyle remuneration surveys have shown successive decline in the use of performance-based pay in New Zealand. Yet it is critical not only to the organisation’s bottomline, but also to the retention of top talent – particularly at senior executive level, Mr Moyle says.

“Performance pay is designed to reward executives for achieving financial targets. When this remuneration strategy works, it will cover the costs of the performance payments, and add growth to the bottomline. If the executives don’t hit their targets - for whatever reason – then they should not receive their full bonus payments,” Mr Moyle says.

Internationally the trend has been for a greater level of executive remuneration to be incentive-based. “Companies are conscious about costs, and salaries are a big one. If they can shift more into the ‘at risk’ component of an executive package, that should benefit the overall profitability of the business.

“While the decreasing use of incentive pay in New Zealand generally bucks the international trend, we have heard recently of organisations such as Fonterra where the performance-based remuneration strategy has performed exactly as it should – rewarding the CEO for a good year when goals were reached.”

The 2010 Moyle CEO Survey, released earlier this year, shows the incidence of performance pay-outs dropped from 53% in 2008 to 43% in 2009, and only 55% of CEOs were eligible for performance pay, says Mr Moyle. This indicates that some companies have put incentive schemes on hold. There is some concern in executive ranks that no matter how well they performed, the global recession was such they were never going to hit their targets. “There’s a sense that is slightly unfair - that their pay was affected by events out of their control.”

Unfortunately, some believe that if the incentive scheme doesn’t pay out, it must not be working and therefore it should be scrapped. In fact, it may actually be working exactly as it is intended, says Mr Moyle.

The Typical NZ CEO:

Personal Profile: • Is aged between 47 and 59, with a median age of 55 years. • Is male. • Has been in his/her position for less than five years.

Total Package: • Receives a total cost package worth $305,000. • Earns a median base salary of $200,000. • Earns most if he/she lives in Wellington, followed by Auckland, then Christchurch.

Common Benefits:. • Probably has the full use of a company car, or receives cash in lieu. • Probably is a member of an employer-subsidised superannuation scheme.

Other: • Has four weeks’ annual leave. • Has an annual salary review. • May have some form of performance-based remuneration (typically in the form of a bonus), receiving $40,000 per annum at the median, ie 18% of base pay or 13% of total cost.

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