Aligning CEO incentives to EVA

Waikato Times, Thursday, April 6, 2000
Aligning CEO incentives to EVA

Chief executives of big companies often receive generous salaries bearing little relationship to the sharply lower returns they generate for shareholders, research by ANZ Bank shows.

The bank estimates 500 of New Zealand’s largest companies lost about $6.5 billion of shareholder wealth in 1998.

Last year alone, the sharemarket’s top 40 companies shed $1.2 billion.

The research, which updates an ANZ analysis on shareholder wealth, issued last year, estimates companies on the sharemarket’s NZSE 40 index have shed $14 billion in shareholder value since 1991.

That represents more than a quarter of the sharemarket’s total current value.

Questions are raised about the caliber of corporate management, the executive remuneration structure and New Zealand’s broader economic performance, ANZ’s head of corporate finance, Joseph Healy, said.

“It’s a massive concern for the whole economy and needs to be addressed.”

The loss of shareholder wealth explained both the sharemarket’s recent poor performance and New Zealand’s lackluster economic rankings on several scores internationally.

Poor underlying company performances and the way they were measured were at the heart of the problem.

ANZ’s research also highlighted flaws in the remuneration structures of many chief executives and other senior managers particularly in companies that had surrendered shareholder wealth in recent years.

“The more million dollar plus executives we have in New Zealand the better, so long as compensation is aligned to value creation,” Mr Healy said.

“Right now, there is virtually no link, except for a few businesses such as Telecom.”

Evidence suggested remuneration packages for chief’ executives and other senior executives were “insensitive” to the creation of shareholder wealth.

“Instead, compensation is linked to the size of firms and to comparisons with similar sized overseas firms.

“There is little correlation to shareholder added value.”

This mismatch of’ executive compensation and shareholder wealth, combined with an “explosive growth” in executive salaries in the past decade, had sparked concerns among shareholders in many countries.

“To pay high fixed salaries regardless of how well you have governed shareholder funds is clearly a flaw in any sensible governance structure,” Mr Healy said.

“Equally, a failure to reward in a material way those responsible for creating shareholder wealth is a fundamental mistake.”