Executive tenure and shifting goalposts

Rory Gregg

Rory is an Associate Director at Grant Thornton, leading their Business Transformation consulting practice in Sydney. His specialties are business strategy, performance improvement, and transformational change. Follow him on Twitter @rory_gregg

Executive leadership is often portrayed as high pressure, where survival is driven by KPIs. If targets aren’t achieved, you will quickly be shown the door. Boards justify spectacular executive packages by citing the uncertainty of the top job, and the notion that people who actively seek leadership positions need to be given an enormous incentive to create shareholder value.

The reality is often rather different. This report into Australian executive tenure at the 50 largest companies listed on the ASX was submitted to the Productivity Commision in 2009.

It showed that Australian CEOs at publicly listed companies can expect a very long run indeed once hired (8.5 years), and are most likely (57%) to leave using a golden parachute retirement package.

Even when the board decides to terminate the CEO (29%), an Australian CEO still averages 5.5 years in the job. Figures from the US show an average CEO tenure of roughly 6 years, with research indicating a strong link between share price performance and the length of a CEO’s tenure, with US CEOs most likely to be shown the door when the share price declines for a significant period of time – regardless of profitability or other targets.

In comparison, Australia’s 2009 economy wide employment figures published by the OECD show that 43% of the Australian workforce have been in their current job for less than 3 years. In case you were wondering, before the financial turmoil hit, the figure was 44% in 2004, and 45% in 2001.

In other words, an entire generation of workers already know they need to polish up their resumes by the time they hit their 3rd year on the job. By that point, even a chronically underperforming Australian CEO will still have great odds of working another 3 years in the top job, before needing to look for another gig.

Executive remuneration is generally tied to the achievement of specific financial targets and internal KPIs. This is intended to give leaders a strong financial reason to achieve business goals. Unfortunately, some Australian corporate boards have a poor track record of protecting shareholders interests in this area.

The Australian Shareholders Association has recently highlighted attempts by the boards of Wesfarmers and QR National to shift the goal posts, and pay their executives enormous bonuses – despite their failure to achieve business goals. These types of governance problems happen quite regularly, and led to the new 2 strikes rule within the Corporations act.

In a nutshell, the new rules require votes at AGMs to specifically cover executive remuneration, and allow shareholders to vote on a spill motion for most board positions if remuneration votes aren’t approved by 75% of votes at 2 successive AGMs.

So what impact will the new amendments to the federal Corporations Act have?

Well, I think most CEOs can certainly breathe easy – as the rule changes are mostly AGM related procedural pantomime.

Without a major institutional investor rattling cages, shareholder activists are not likely to be a threat to executive pay packets. The simple reality is that the Corporations Act already provides shareholders representing 5% of issued voting capital with the power to call for a spill resolution, or hold a spill meeting on any issue. In other words, it is business as usual for CEOs.

Tags: CEO pay, KPIs, leadership, remuneration