Companies Hire New CEOs at a Discount

Top Australian companies are currently showing caution with remuneration, paying new CEO hires at a significant discount to the outgoing talent.

Examining the ASX 200 companies that provided information on the remuneration of incoming CEOs since January 2016, it is clear that most new appointments are receiving lower remuneration packages than their predecessors.

The following table and graph show the difference between new and outgoing CEOs for total fixed remuneration (TFR), short term incentive (STI), long term incentive (LTI) and total remuneration (TR). The table shows statistics for the change in remuneration between the outgoing and the new CEO on a per company basis. The figure shows the remuneration data for new CEOs and outgoing CEOs in aggregate.

Difference between remuneration of new hires versus incumbent CEOs

TFR STI LTI TR
75th Percentile 3% 9% 13% 4%
Median -10% -5% 2% -6%
Average -9% -11% 6% -7%
25th Percentile -25% -45% -16% -23%

New CEO vs Old CEO pay

Fixed remuneration

This element of remuneration saw the highest reduction for newcomers at the median on a company-to-company basis. Many Boards would consider this to be a prudent move – even with an internal hire, it makes sense to contain fixed costs until the new CEO has runs on the board.

Some CEOs have however received higher fixed remuneration levels than their predecessors, showing that relative remuneration levels will depend on the experience and skills of the incoming CEO and the company’s situation.

Short term incentive

At the median short term incentive levels were also lower for new hires than for outgoing CEOs, although the difference was not as marked on a company-to-company basis as for fixed remuneration.

Some companies have seen significant reductions in short term incentives and two resources companies decided not to offer a short term incentive. Where long term or strategic goals are the key focus or cash flow in short supply, this is viable remuneration strategy.

Long term incentives

This was the only remuneration element where incoming CEOs are being offered more on average than their predecessors on a company-to-company basis (though lower in aggregate). This might be an acknowledgement of shareholders wishes that companies have a long rather than short term view and in part reflect “unlatching” costs associated with foregone benefits with a previous employer. It also helps align the new CEO with shareholders by providing the CEO with a deferred interest in the company’s equity.

This trend does, however, fly in the face of current sentiment in the UK, where investors are calling for traditional long term incentives to be phased out. These calls have been backed by the recommendations of a UK House of Commons Select Committee inquiry.

Conclusion

The trend for new CEOs to be paid less than the incumbent talent is not new. Egan Associates conducted a similar investigation in 2013 that drew the same conclusions from the prevailing data.

Especially where a new hire is internal, which many Boards consider preferable unless there is significant need to transform the company, it makes sense that the remuneration of an outgoing versus incoming CEO reflects their tenure and experience, especially if the outgoing CEO has spent a longer than average time at the company.

In the current environment of modest annual wage increases (see our article from this month on the minimum wage), it also makes sense for Boards to show restraint.

As the new CEO demonstrates effective performance, their remuneration normally increases.

The data

Data was collected on a package for package basis rather than looking at the actual remuneration and grants for the outgoing CEO’s final year in an attempt to compare like for like.

Where a joint CEO became a standalone CEO or an executive chairman remained in that role and hired a CEO alongside, the data has not been included.

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