Growing pay gap between CEOs, staff

The gap between the pay of CEOs and the people they manage may be getting bigger, survey data suggest.

In BusinessDay’s second annual survey of pay rates in top listed companies, we found CEOs were paid an average 22.5 times more than their employees in the 2011 financial year, up from 21.9 times a year earlier.

Of the 26 companies in the NZX50 index with figures available for comparison, the pay multiple increased in 19 and decreased in seven.

The average pay for the CEOs during the year was $1.44 million, up 3.3 per cent from $1.39m in 2010. The average for their employees, estimated by dividing the total pay bill by the number of staff, was $63,960, up just 0.8 per cent on the previous year.

Those numbers indicate New Zealand’s pay rates are a long way from the extremes seen in the United States. In April this year, an executive pay report from The American Federation of Labor and Congress of Industrial Organisations found CEOs in the Fortune 500 made an average 380 times the average worker’s pay in 2011, up from 343 times in 2010.

Despite the smaller pay gap in this country, Council of Trade Unions president Helen Kelly said the issue was significant.

‘‘It feeds into the concerns people have about the rich getting richer,’’ she said.

‘‘It is about a relativity issue and what the research suggests is that gap contributes to a whole lot of negative social indicators.’’

John McGill, managing director of pay consultancy Strategic Pay, said the BusinessDay survey was consistent with his firm’s own data.

‘‘Pay relativities are changing,’’ he said. ‘‘Our database shows them to be increasing in recent years.’’

But there was no reason for concern at local pay differentials, he said.

‘‘The fact there aren’t that many really good CEOs around sometimes gets forgotten ... CEOs can have a pretty big impact on organisations they control – Ralph Norris at Air New Zealand, for example.’’

The now retired Norris, who later became Australia’s highest paid banker, achieved a major turnaround in his three years at Air NZ. He took over the reins in 2002, shortly after the Government’s $885m bailout rescued the airline from financial oblivion.

However, while capable CEOs are highly sought-after and their pay is often performance-related, pay rates also correlate with the size of the company they lead – the bigger the company, the more the CEO tends to be paid.

That outcome might be expected.

But does it matter how much CEOs are paid relative to their staff?

The survey data suggest there is no normal pay multiple. Some of the highest multiples occur in businesses where large numbers of staff are relatively low paid or part-time, such as in retail.

The Warehouse Group and fast food operator Restaurant Brands, for example, had pay multiples of 60.3 and 51.9 respectively.

The complexity of running those companies though may be no different to running one where staff are higher paid.

The highest multiple in the survey was at casino operator SkyCity, whose CEO Nigel Morrison earned an estimated 67.5 times more than the company’s average employee.

SkyCity’s general manager of human resources Grainne Troute said a major factor in that finding was the significant number of staff who were part-time, casual or seasonal.

‘‘Just over 50 per cent of our staff do not work a full-time, 40-hour week,’’ she said. Average earnings of the 2887 full-time staff were $53,000, which would indicate a CEO pay multiple of 49, she said.

In contrast, some of the lowest multiples occur in companies whose staff are relatively highly paid, such as at New Zealand Refining, on 8.6, and Air New Zealand, on 18.6.

Telecom, with among the most highly paid staff and the third highest CEO pay multiple on 51.6, is an exception to the rule.

With such variability, a high or low pay multiple should not in itself imply inappropriate pay levels.

But it is less clear why pay multiples should appear to trend upwards. According to a PhD study by Helen Roberts of Otago University, who tracked listed company pay rates from 1997 to 2002, the average chief executive’s pay grew from 11.8 times the national worker average to 15.2 times over the period, in real terms.

The BusinessDay data for 2011 implies an average CEO pay in NZX50 companies of about 26 times the national worker average, as measured by the Statistics New Zealand income survey.

While the data sets are not the same, they lend support to the theory that the pay gap is continuing to grow.

Looking more closely at the latest figures, of the seven companies showing a fall in pay multiples from 2010 to 2011, five had a change in CEO — Skellerup, PGG Wrightson, Contact Energy, Nuplex and The Warehouse. In all five, the new CEO began at a lower pay rate than his predecessor.

However, Canterbury University economics professor Glenn Boyle cautions against reading too much into the trend.

‘‘On a time series basis it’s always going to go up and down with the business cycle a bit,’’ he said.

‘‘In a recession a firm starts laying off workers and earnings stagnate, but you still have to have a CEO, so the ratio is going to naturally go up during recessions, and maybe naturally go down during expansions.’’

Without some other criteria, it was not possible to say whether any level was objectively too high. ‘‘Labour markets are much more internationally mobile than they used to be, so much more of the so-called surplus has been commandeered by talent, which in the business world is CEOs,’’ said Boyle.

‘‘But it’s not restricted to CEOs. I suspect if you did the same thing with top performers in music, literature, sport, et cetera, you’d find the same sort of ratio increase.’’

If so, we may see more upward pressure on the pay multiple as overseas pay rates influence expectations among New Zealand CEOs.

Vince Hawksworth, CEO of electricity company TrustPower, thinks pay is not a great motivator for most people.

‘‘I have a view that 99.9 per cent of people turn up to work every day wanting to do a good job,’’ he said.

‘‘They don’t turn up thinking ‘am I being paid fairly?’.

‘‘Certainly if pay is not fair I think it’s a disincentive, but I don’t think it’s the ultimate incentive.’’

It certainly looks that way for him. The figures in TrustPower’s annual report imply the former coal miner makes about $570,000 a year, roughly eight times as much as the average TrustPower employee.

At that level, TrustPower does not look overly generous in its CEO’s remuneration. Contact Energy, which operates in the same sector, paid its CEO $1.6m in 2011, about 17 times as much as its average employee.

Hawksworth doesn’t seem bothered.

‘‘When you get to a chief executive role, it’s a lot about ‘am I working on stuff I really enjoy?’ Because a lot of hours go in, a lot of potential stress and pressures. [It’s about] are you working with a good board, a good team of people, do you love the stuff you do?

‘‘I think those are really important things for human beings. That said, nobody wants to think they’re being underpaid.’’

At TrustPower, the company tries to be systematic in its approach to pay rates.

‘‘For all staff from first new entrant to the most senior level we use well known indices and methodologies that are available in the market,’’ said Hawksworth.

The process has two objectives. ‘‘One, test our pay rates compared with the market; and the other to position people on appropriate bands for the work that they do.’’

His own pay is worked out using a similar market testing process, he said, but the final amount is the board’s decision.

‘‘The reality is that the very senior roles can be of limited tenure, and sometimes people do very well because shareholders have done very well, and sometimes they don’t do so well.

‘‘There is a lot of complexity in that conversation and I don’t think New Zealand is extravagant compared with elsewhere in the world.’’

In the United States, listed companies are lobbying hard against new pay disclosure rules in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 953, yet to be implemented, will require companies to disclose details including the ratio between the CEO’s total pay and the median total pay for all other company employees.

The union movement is lobbying hard in the other direction.

In Britain, Labour peer Lord Gavron has proposed amendments to the Companies Act requiring disclosure of the comparison between the highest paid person in a company to the average of the lowest paid 10 per cent.

So is there any evidence specifically linking the pay gap with corporate performance?

The only recent academic study is from Korea, which has required disclosure of relative pay rates for the last 12 years.

A paper by four researchers at Seoul National University said that a high executive pay multiple had ‘‘a statistically significant negative relation with subsequent operating and stock performance’’.

Their findings also suggested an unusually low pay multiple was associated with poorer corporate performance.

High and low pay multiples could influence performance through increased executive and staff turnover, the researchers said.

The Dominion Post