Executive SearchANZ Bank Set a New Landmark in the Evolution of Executive Remuneration Strategy
June 22, 2007
PAY SYMMETRY
FROM PRINCIPLE TO PRACTICE
(Or ... How ANZ's Remuneration Package for its New CEO is Setting a Fresh Standard)
From origins long ago of a simple base pay plus an unexpected, but welcomed, gratuity, for successful results in terms of profitability or major milestone completion, reward contracts for Chief Executive Officers have developed with multiple time-frames that emphasise a variety of corporate performance indicators.
Over the past decade, it has been the contract design for the engagements of Mr Paul Anderson by BHP Billiton (in which the writer played a part) and, some time later, Mr Sol Trujillo for Telstra, that have set benchmarks for CEO contract design.
Now, we have the appointment of Mr Michael Smith to become the CEO of the Australia and New Zealand Banking Group Ltd to thank for what may well be considered a further landmark in the evolution of executive remuneration strategy.
The package for Mr Smith is remarkable in both its structure and quantum, with the numeral "3" featuring extensively -
- A sign-on incentive of $9 million, deliverable in three instalments each of $3 million in cash-equivalent form, on successive anniversaries of commencement of employment;
- A three-year contract with 12-month rollovers;
- Base remuneration at the rate of $3 million per annum, reviewable annually;
- Short-term incentive with a potential reward of $3 million each financial year; and,
- Long-term incentive of three $3 million tranches of performance share rights, exercisable subject to the ANZ's Total Shareholder Return achieving challenging comparative levels, over three three-year staged intervals.
Now, the prominence of "3" may seem quirky, but it is the parity of value in the reward elements that is the most significant observation for us. In effect, the annual reward potential for Mr Smith in the three initial years of his contract are $3 million in each of sign-on incentive, base pay, short-term incentive and long-term incentive.
Consultants and theorists in remuneration (especially those with American connections) have told us, for decades, about how such parity is the ideal construct for CEO pay.
The writer has always held such tenets of faith with a deal of scepticism. After all, why should the real world be shaped according to some nicety of numbers? Well, it seems that the theorists are winning, if the ANZ CEO negotiations are any indicator.
What does this all mean for the Remuneration Committees of prominent companies?
- Firstly, that major companies often set the trend for others to consider in their own particular reward philosophies and strategy; and,
- Secondly, that all possible elements of the reward package for a CEO are important. To ignore or de-value any item in negotiations should only be done if there are distinctive factors that dictate such digression.
In the writer’s experience, the contextual considerations that we have found to be important for consideration of CEO reward are:
- Where the company is at presently, in the corporate life-cycle;
- The nature of the industry and the market factors prevailing; and,
- The sourcing of the CEO candidate.
OPPEUS is very well poised to provide the full suite of services - search, selection, appraisal, reward strategy and on-boarding - to Boards as they make or renew their appointments of the most crucial employee of their respective organisations.
Bill Patullo ACIS, CAHRI
Practice Leader – Remuneration
