Executive Remuneration Decision Making

[00:00:00] Today, join host Richard Conway as he interviews Greg Ridder, Chair of kogan.com, and Life Without Barriers about executive remuneration and finding the balance between fairness, market expectations, and shareholder value.

[00:00:17] Richard: Welcome to Minutes by boardcycle. I'm your host, Richard Conway, and today on the podcast I'm pleased to be interviewing Greg Ridder.

[00:00:24] Richard: Greg is the chair of Kogan.com, the well-known online retailer, and he also chairs Life Without Barriers a not-for-profit offering a wide range of support services from disability, to aged care, to foster care.

[00:00:37] Richard: Today, Greg has kindly agreed to talk to me about how boards should think about an approach that perennially challenging topic of executive remuneration.

[00:00:46] Richard: Welcome, Greg.

[00:00:47] Greg: Hello, Richard. Pleased to be here.

[00:00:49] Richard1: So, to start off with Greg, could you outline some of the key factors that you have in mind as a chair when you are making these exec remuneration decisions? And is there a, like an ultimate guiding light that you have in your mind when you're weighing up for different factors that come into play?

[00:01:06] Greg: Yeah. To me, there's an old-fashioned principle. It's often said that people, I think forget it, it's simply attract and retain. It sounds really trite to say it at a high level. But, once you deconstruct that, it's all about how do you get the right talent, the right incentive, the right people in place, and have them motivated to be their best selves where they are and to achieve to levels that one should expect, and even to stretch beyond that.

[00:01:36] Greg: So, that sort of sits there. But for me, the real core of that sits in terms of kind of a sense of justice. It's what's fair and what's appropriate.

[00:01:48] Greg: Sometimes organisations have conspired to lose sight of that. So it often depends where one picks up in the cycle. For very senior exec rem, whether it's for example, on market expectations, normal construct, or whether there's been a lapse or a delay, which has meant that it's out of sync with what is fair and appropriate in the market.

[00:02:13] Greg: So, I think it's kind of where you're starting from comes first. And then in my view, we then build appropriately to what's market appropriate, what's got the right comparisons, what's got the right measures, what meets norms and expectations in terms of the construct and the amount. But sometimes you have to work to get there. And with rem, sometimes that takes a few years.

[00:02:39] Richard: Yes. And when you're talking about market norms there, Greg an interesting point I wanted to ask you about is, are you thinking about this specific individual that there, or are you thinking more broadly about individuals in that category? And the reason for asking that is very recently the time that we're recording this, there's been some stuff in the newspapers about Xero’s executive rem for example, and one of the comments about that is sort of the, what that particular CEO could get into market and I'd be interested in your thoughts on that scenario.

[00:03:14] Greg: I mean, I'm not exactly privy to Xero’s circumstance, but there is a very large package there. And somewhere they had in mind that they wanted this particular person and if that's the market rate for that person, then the challenge is before the directors to ask those questions of themselves.

[00:03:36] Greg: Now there's "who's got the cards" type of thing, but what market are you really playing in? And I've worked for an American company and seen the Americanisation of wages, some companies vie for talent up against, for example, I'm not talking about Xero necessarily, but up against Silicon Valley, up against West Coast US, up against New York.

[00:03:59] Greg: And I recall way, way back Amcor, I think, the CEO of Amkor was not the highest paid, employee. It was his North American subordinate who was the highest paid because that was the market that was comparable.

[00:04:12] Greg: However, having said that, boards have to make the choice about when is the price too high. And like anything we want to buy, there's a walkaway point where you say, well, it's just not worth that value. And that applies to any of the rem circumstances I think.

[00:04:26] Richard: Yep. And picking up on your point around who holds the cards in these discussions, I guess for an ongoing CEO, there's always going to be some kind of negative impact to the company if they end up leaving over a rem scenario. So, are they really holding the cards in that negotiation?

[00:04:46] Greg: Look, everyone holds some cards. It is a negotiation. But I think I'd go back to the principle of what's fair and just.

[00:04:54] Greg: If the storyline is 'I'm underpaid compared to the market,' then it's incumbent on the board to compare properly to the market. And then determine the performance level of that executive compared to some points along that scale.

[00:05:10] Greg: So typically we'd say, where do we think you are? Are you a median? Are you a 75th percentile? This sort of stuff. And we'd use time in the job, evaluate past performance, all of those things.

[00:05:21] Greg: Because the worst thing that could happen really, is you lose someone because you're underpaying them and they just go to somewhere else that's fair and reasonable.

[00:05:30] Richard: Yep. Absolutely. And Greg, how do you take into account the views of proxy advisors or institutional shareholders in this space? And I guess we have seen in Australia, an increasing number of strikes in listed companies. So, I guess what we are seeing there is boards being more willing to challenge the pressure from those kind of stakeholders. How do you take that into account and when is an appropriate time to challenge their views on those things?

[00:06:00] Greg: One thing I've experienced is that proxy advisors love things to be inside the norm of expectation, structure and amount.

[00:06:10] Greg: When it's outside those norms, it's very hard for them to really give an endorsement for that. And I've had the experience with Kogan, if we go back some years, where go back to where we started the conversation, what's fair and just. When that organisation first listed, inappropriate attention was given to executive rem.

[00:06:32] Greg: Then, four years down the track, I'm sitting on a board with an executive, a Chief Executive who is the lowest paid CEO on the ASX 300. With no short-term incentive and no long-term incentive. And so, we set about putting a bit of a remediation package together.

[00:06:53] Greg: So it had an element of backward looking, but only a small element and it focused on a really strong reward for the next three years. And that was very difficult for proxy advisors to endorse. In fact, they did not endorse it. And it forced us to talk directly to all the major shareholders of the company. Explain the situation, really place the importance and value on, on this being a once-off adjustment. And then, after that once-off adjustment and the expiry of that coming three years where there would be no further alteration to rem, to then move into a normalised rem package that fits the construct enough to be close enough to "plain vanilla", that got over the line by shareholder vote.

[00:07:44] Greg: So the second part of your question, we are seeing a lot of, whether we think they're running the gauntlet, I don't think so, but we are seeing remuneration strikes being more common and we are familiar that if you have two strikes in a row, there is an expectation that the board is spilled and so on.

[00:08:01] Greg: The striking down a rem report, which is only advisory, is somewhat a slap on the wrist. But it's also representatives of shareholders telling you they don't like where you're going, so please pay attention and get your act together. And that typically straightens up in the second year a little bit.

[00:08:24] Greg: But, I've experienced also proxy advisors who continue to vote against. But they're voting, they're not always voting against on a prospective view. It's still a no because of what happened the year before, or even though shareholders have approved it the year before. I find that very challenging.

[00:08:45] Greg: But what I also find is, for those organisations that do have two strikes in a row, typically they will have a reserve resolution to say, "Do you really want us shareholders to spill the board?" And that it is almost never invoked. So, I suppose we can draw conclusions about are people sensing that they can push back on it.

[00:09:08] Greg: I think there's a mixture of individual circumstance and the time it takes to move through rem cycles to get to the right outcomes.

[00:09:17] Richard: Yep. And so, do you think from what you just said there, that sometimes the policies that proxy advisors, etc., have are two black and white, or don't allow enough, flexibility for a company's individual specific circumstances?

[00:09:32] Greg: Yes I do. In a broad sense, I do. But having said that, companies should be better at not getting themselves into the circumstance in the first place where these things haven't been properly addressed with enough regularity to stay inside the guide rails, let's say.

[00:09:47] Greg: And so, I think that's also incumbent then on organisations to just be better at the process.

[00:09:53] Richard: Yeah, you touched on earlier having seen the Americanisation of salaries. And so, I wanted to pick up on that and ask you whether you feel in Australia in particular there's too much of a sort of zero-sum game perspective of executive remuneration or what's your perspective on that compared to say, the US scenario?

[00:10:16] Greg: I don't think anywhere there's a zero sum game of you're giving it to the executive, therefore you're not giving it to the shareholder. There should always be appropriate measures, metrics attached to this.

[00:10:28] Greg: I'd like to think any, any good construct should be, everyone's a winner. You reward your executives for the value they create, and shareholders go along with that ride, and are also well rewarded. And we can see outrageous numbers if we really want to talk about what the US does with Elon Musk and things like that.

[00:10:48] Greg: And you go, "Wow, there's so many zeros that we are talking billions." But to achieve it, there should also be enormous reward for shareholders who basically are telling the courts they're happy to pay.

[00:11:02] Greg: So, the shareholders last time I looked do really have a fair say in running the organisation. But look, it's never that cut and dried.

[00:11:11] Richard: Yes. And Greg, to finish up on this topic, the clear expectation of remuneration design is, as you've alluded to align, a CEO's outcomes to delivering shareholder value, etc. We all know that remuneration influences behavior, and sometimes you can't predict exactly how that's going to play out. But are there some key areas of this remuneration design that you think essential or areas on the flip side, which you think are real pitfalls that, that should be avoided but you see do come up, when they shouldn't?

[00:11:47] Greg: Yeah. I mean, my personal preference is metrics that tie to everyone's a winner. I have seen ones that give, quite soft gets to executives. So you could these might be implementation of softer things, which I mean, basically I might just put it down to “that's your job. You should be doing that” - improving the engagement score with employees, improving other metrics internal efficiencies, implementing a new ERP or CRM system or whatever it might be.

[00:12:20] Greg: And getting points for doing your job. And getting soft remuneration with an easy, easy, binary outcome for the proportion of reward that that is. It's either a yes or a no. So basically, I did it in this timeframe, therefore there's, I don't know, 20 points out of my hundred points that I'm going to get.

[00:12:39] Greg: And so, I'm not a great fan of those. I am a great fan of creating shareholder value and everyone participating in that, with an appropriate proportionality. The only exception to that, that I have appetite for really is where comparative performance.

[00:13:00] Greg: All be it, that that performance might be negative. But against an appropriate and broad peer group, if negative performance occurs, and so shareholders may have been diminished, but the executives have delivered in relative terms far in excess of what others have achieved.

[00:13:18] Greg: Then I think they still warrant reward. And I think shareholders should, in that case, be thankful they've got great executives at the helm. Those great exec executives basically stopped shareholders losing more money or the organisation losing more value.