David Hargreaves argues that the Government's decision to end 'performance' pay for public service CEOs sends a poor signal that bodes ill for the country's productivity

David Hargreaves argues that the Government's decision to end 'performance' pay for public service CEOs sends a poor signal that bodes ill for the country's productivity

By David Hargreaves

State Services Minister Chris Hipkins has declared that the Government will be “putting the breaks on the growth rate of chief executives' pay” by removing performance pay for public sector CEOs.

In my view that's a fairly glib assessment that warrants further investigation. Even if we do accept on face value that CEOs' pay will actually reduce  - and I don't think it will - this move by the Government sends all the wrong signals about productivity.

On a very basic level, the new policy for CEO pay means that the CEOs could be earning as much as 7.5% less in a year than they have been. But that figure assumes that everybody would have got all their 'performance-based' bonuses.

I think a more informative perspective is to take the 'base salary'. That, at a stroke of a pen has been increased by 10%. 

Poorly-performing CEOs in fact see their earnings potentially increase by 14.4%.

Shall we say, mediocre, CEOs see their earnings potentially increase by 3.9%

And finally, only the supposedly strongly achieving, the 'performing' CEOs, are 'rewarded' by seeing their potential pay fall, yes, they take a pay cut - by 7.5%.

Mixed signals?

The other thing of course is that the CEOs now, regardless of performance, get an extra week of paid leave, which is nice. 

They also now get to review their salaries every year - as opposed to just once in a three-to-five-year term. This particularly clause will, I think, be the killer than ensures the claimed cut in salaries over the next few years won't happen and that the opposite will happen. But it won't be based on performance. It will be based on working the system.

My immediate response to the Government's announcement of these changes (not that they have emphasised the detail I've just given you) is that Hipkins is glibly accepting and promulgating the idea that the concept of 'performance pay' is a freebie. It's something that the potential recipient will get regardless of whether the 'performance' is really there or not.

Now, I must accept upfront that it appears from the information available that the public sector HAS been treating this CEOs' performance pay as a freebie and handing out the bonuses liberally. But that's a problem with implementation. That's not a problem with the idea.

The concept that good performance is rewarded is a valid one. You don't scrap a whole idea just because you've been implementing it badly. You fix your implementation.

I take with a very big pinch of salt the suggestion that this move by the Government will save taxpayers $4 million over the next few years. Time will tell, but I reckon it will cost more. As of now (post-scrapping of 'performance pay') base salaries of the CEOs have been fixed at a much higher level than previously.

Additionally, under the new agreement, the CEOs, I stress again, will now have their salary reviewed EVERY year, as opposed to just maybe once during their term of office. And they are all getting an extra five days' of holiday (bringing the total to 25) in a year. Nice.

The other point that was largely lost in Hipkins' announcement was that this was not just the Government removing the 'performance' incentive from public sector CEOs, but also the 'non-performance' element from the pay structure.

Now, I think that's real bad. They've taken away both the carrot and the stick.

I'm a big fan of senior executives having an 'at-risk' portion of salary that they simply don't get if they don't achieve certain targets.

The reality of the announcement from Hipkins is that the 27 CEOs in question have, at a stroke, received a 10%+ increase in their guaranteed pay, because the 'at-risk' portion of their salary has now been wrapped back into their base salary.

Now, again, the key here seems to have been a question of implementation. Or non-implementation.

The Cabinet paper backgrounding the decision states that: "Effectively, it [the at-risk pay] is withheld salary and in all but a very small number of cases (one or two a year) has been paid in full, since it was introduced in 2014." 

Okay, so, that again is not a problem with the idea, it's a problem with the fact that clearly nobody's come up with the right way of measuring performance. 'At-risk' salary should be just that - at risk of not being earned if targets are not achieved.

It is arguably harder to find tangible 'targets' for CEOs to achieve in the public sector than in the private sector, since the private sector tends to be about growing the business and earnings and returns for shareholders.

And too often it seems that in any case the public sector measures its success by 'activity' rather than out and out results. What was done, rather than what was achieved and what the real outcomes were. But activity does not equate to productivity.

What's required is the development of good, robust, performance measures for within the public service. I'm not convinced we are anything like there at the moment.

The basis of the contention that taxpayers will save money over the next few years from these changes is laid out in this graph.

As I read that graph it suggests to me that virtually all of the CEOs have just as a matter of course been not only retaining the 'at-risk' money, but also getting the 15% supposedly 'performance-based' bonuses. 

I don't know if that's the case, because the reports on the senior pay don't break out the bonus payments. And the Cabinet paper states only that 3.1% of public servants (that's across the entire public service) got performance-based pay last year. But there's no mention of the CEO figures within that. One would suspect a figure closer to 100% - based on the above graph - might be closer for them.

Again the problem is not with the idea, it's with the fact that it clearly wasn't being implemented. Performance pay has been treated as a freebie. It should not be. And it's sending very bad signals to remove any concept of 'performance' from the top levels of the public service as has now been done.

Below is the example that was given for how the CEO pay will now be structured. It's worth a good look.

Based on that example, previously a non-performing CEO might (and should if the system had been applied properly) be paid $440,000.

Now, regardless of performance, the same non-performing CEO will get $503,555. 

That's an increase in guaranteed pay of 14.4%. Nice.

Incentives? Who needs those?

Even to take the more charitable view of saying, okay, our CEO is going to keep the 'at-risk' portion of pay but isn't getting a bonus, that would see the CEO getting $484,444 under the old system. 

So, they are still getting a healthy increase in pay - up by 3.9% - to that $503,555 figure.

Only if you assume all the CEOs are going to get the performance bonus (which they shouldn't have been doing, but it seems may well have been - but again that's a problem with implementation, not the idea) does the CEO pay go down, by 7.5% from a total figure of $544,444.

I think the CEOs have just been given a massive disincentive to perform - handed to them on a plate.

And I am very sceptical indeed at the claim that salaries will overall reduce over the next few years. No, sorry, not now that CEOs can renegotiate pay every year. 

Okay, you might say, this is not very broad, and we are only talking about a small number of CEOs here.

But remember, the Government's pushing the whole non-performance idea throughout the public service sector.

The key sentence in that text is: "Employers will work toward removing at-risk pay and performance bonuses from pay policies and employment agreements."

What we are seeing is, I think, a move that promotes mediocrity. It's a retrograde step back to the old heavily-unionised days when everybody earned the same regardless of talent or performance.

'Performance' is not a dirty word, as this Government seems to think it is.

It's actually essential for sorting out our famed, or rather infamous, productivity problem.

This is a shocking signal the Government has sent that bodes very ill for the levels of productivity and, yes, performance, in this country.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Is David Hargreaves suggesting public service CEOs should be taking huge pay cuts? I mean, look at the state of public services. I agree with pay reflecting performance, let us start these CEOs on the 'living wage' ($21 pert hour?) and increase their pay slowly IF/AS their performance improves.

Public service CEOs should NOT just expect to start on top dollar, they should have to work their way up like everybody else. I think a lot of these public service CEOs have an entitlement complex.

Great move! Here's the incentive to do a good job - Do it, or someone else will be doing it next year when the annual review gets done. Don't want to take that risk? Then don't! Let someone else do it now. And guess what? There will be a list as long as your arm for suitably qualified Kiwis wanting to earn $500k per annum....and...DO A GOOD JOB!
(NB: Many, most, CEO's etc actually WANT to do a good job; exceed targets etc, not because it means a bonus, but because that's what they want to do "Do a good job!". It means the next post will be better paid - and that's the 'pay rise' that's in the offer)

It means that the good CEOs will move on quickly to those better paying private sector roles whilst the poorly performing ones will get stuck in the public sector.

Please, by that logic all public sector CEOs would only focus on short term results to gain bonuses, stock options, etc and not give a stuff about the long term viability of their respective public sector - hence the high turnover of private sector CEOs in the States.

You can't have it both ways ... also it's called a contract! If money (which they already receive lots of) is their only motivation, we might be better off without them. The idea that a CEO's skills at managing one particular company will carry across to all other companies is frankly a ridiculous fallacy.

The CEOs match the staff. It's poorly performing glorified beneficiaries all the way down.

Like the oil and gas decision this is another ideological, non pragmatic, non outcome related mess. I guess this is the new normal, sigh

I dont agree, based on Climate change we need to get off oil and gas. The Govn is sending a policy signal that this has to happen and sooner than later but has given existing a bit more time, so some pragmatism in there. So the outcome seems pretty clear, less CO2 emissions for NZ.

Rest assured Steven that the effects of climate change will increasingly prove how right you are. If the Antarctic polar vortex catches up with what has already happened in the northern hemisphere, then it will get very interesting down under.

So your happy if NZ produces less CO2? Last I checked climate change was a world wide thing. What will happen with the oil and gas decision as has been pointed out many times is that production will go to countries with lower environmental standards and we will have to import more of our energy (using oil to do so). Nett outcome is more oil and gas used and more risk of an environmental disaster. We also lose the royalties which could have gone to R&D for green energy for example. But hey, as long as we send the right signals!

Edit: Apologies, I just read that back and it sounds pretty facetious which wasn’t my intention, hope it gets the point across though.

CO2 increases plant growth and possibly is helping 'green the Earth' - hence why greenhouse growers pump it in, just saying ..

What, the Taiga is putting on biomass at a rate of knots? Surely not? In the seventies we were scared the oil was going to run out about 1975. Then we were scared that an ice age was due. Thankfully, neither did, but we do seem to have endless warfare for the last 20 years, sort of Vietnam 2.0.

We shouldn't be putting up with nonsense like that, at this stage in the game.

The CO2 we are pulling out of the ground has been there longer than humans have been around. Pull it all out and we die. We evolved in conditions which included its absence.

As an old fart very much in my twilight years I will not be around to see the immense problems that are ahead of us. Many of you younger readers will. Just remember some of us WARNED YOU.

The govt are fixing symptoms rather than the disease. Same thing with their plastic bag ban. I still use plastic bags to line my bins and I still fill up my car with carbon juice. The difference is now the plastic bags will need to be purchased separately or that oil will have to be imported.

I don't see how this is changing peoples' behaviour. Fuel tax will.

By the way it's not NZ plastic bags ending up in the oceans it's China and India doing the damage but we still allow their junk to be sold here.

"this move by the Government sends all the wrong signals about productivity"

Well yes but it's the nature of a leftist government. I think they are considering a Basic Universal Income in the future too. It's more about giving to those that don't have than rewarding those who work.

A UBI would benefit everyone - that's the meaning of universal.

Sorry Kate but that's very naive thinking. Where do you think the money comes from to pay the UBI to everyone?

UBI in simple terms.
Paul & John flat together.
John sleeps in, then relaxes all day watching tv & playing video games.
Paul gets up at 7, braves the traffic to go to work, works all day, braves the traffic back home.
Once at home, Paul shares his income from his work with John.
That's UBI

You're right - and we already have a UBI that takes up over 60% of our social welfare budget, albeit it's age-limited. Folk slacking around at home and getting money for nothing.

If a society permits persons to be born or migrated into it then surely it shoud supply the means of existence.

Unfortunately "society" isn't what causes a kid to be born.. it's parents do.. and we seem to be taking responsibility for their actions away from them, and foisting it on taxpayers. Would be rather nice if people that can not afford/are unwilling to support their offspring would stop popping the little blighters out.

Mother Nature is far stronger than that, going by your theory, sub-Saharan Africa should be almost devoid of people by now.

China has shown our world that a society can have immense impacts uopn procreation.

What theory? That we ( as in NZ) are taking responsibility for the groinfruit away from the parents and increasingly foisting it on the rest of NZ society? The ever growing cries about child poverty and all the new handouts that seem to be popping up.. subsidised daycare, Best start Tax credit etc evidence enough if you ask me.

Minister Hipkins should change the employment law so to exclude all executives above a certain threshold, they can be “ contracted “ with out all employment safe guards . They are grown ups and don’t need the state to protect them .

The thing that hasn't been discussed/mentioned is what happens with the non-CEO's who get performance incentives.

Both in the Corporate and Government sectors, STI (short term incentive) schemes are everywhere. Basically anyone with the word "Manager" anywhere in a top 50 corporate or government unit usually has a 10%-30% at risk component.

So they have done away with the CEO's bonus, what about the CFO, Head of IT Operations, HR Business partners, Payroll Manager etc. These people haven't had their bonuses cut, which highlights what a piece of show-ponying it is.

That said, in the middle of tough teacher negotiotations, and other sectors coming for them, freezing MP pay cuts and CEO bonuses both represent exceptional value for money show-ponying :)

Chairman Big Note Winston and his supporters club obviously wants to bring the the civil servants to heel. Simple enough, really. Is it just me, or is he sort of our Erdogan Light, and Looney Labour and the Silly Greens his useful idiots? In short, is he not kingmaker, but King?

Sorry if that comes across as biassed, I must try to come up with a word cartoon of National's weaknesses. Any ideas welcome. National For Sale seems too harsh, but not completely wrong.

The beauty of a cartoon is it doesn't use up the bandwidth of a more complex but accurate verbose description of the weakness. This freeing of bandwidth allows the exploration of the ramifications of the idea rather than using it all up in describing it. That was the verbose description. The cartoon is Yer can See the Smoke and Mirrors.

Hmm, perhaps it should be Big Tic Winston and Big Note Shane?

Some good discussion on what performance is here. CEO performance for government Departments is most commonly driven by politics. No Government wants to be embarrassed by what is happening on it's patch. The problem is this ends up being the driving mantra. Secondary is not so much efficiency, but spend less tax payer funds as the politicians starve you of funds while demanding ever more out put. Sometimes this results in improved efficiencies, but mostly just results in a Department that is failing big time - Oranga Tamariki, MBIE and MPI are just a few examples.

The user pays principle further corrupts the picture as Departments such as the CAA tries to make the aviation industry pay for as much of it's budget as possible, to the point they have effectively destroyed a significant part of the industry and what remains at the bottom, struggles to keep their heads above water. The CAA and the Government fail to recognise that the whole country is a user and benefits from regulation of the aviation sector and therefore any user pays application will place an unfair burden on individuals, effectively discouraging their participation.

Most if not all Government Departments are not there to make profits, they are there to regulate aspects of our economy to the benefit of all. Efficiency and effectiveness should be the primary criteria, not some vague kowtowing to ever changing political goal posts.

I think it's great and lines up perfectly with the education sector. Performance is no measure of a persons worth or feelings! We need to get rid of the meritocracy!

Saying what's expected has always been the way to get the easy marks.