The rising levels in executive pay packages continues to come under increasing scrutiny from remuneration committees, social and ethics committees and main boards. The gap between the top wage earners and those at the bottom of South Africa’s largest companies continues to grow amidst recent strikes in the platinum mining sector and uncertainty in the market. “Growing discontent about pay differentials between executives and low income earners has forced many organisations to relook the entire approach toward pay models, pay packages and strategies,” says Gerald Seegers, PwC Head of Human Resources Services for Southern Africa.
“There is still much debate about what exactly the corrective interventions should be, as the underlying cause may not only be the perceived high level of executive compensation, but also a host of other problems, including unemployment and poor service delivery. The pay gap in South Africa remains relative compared to that in the UK and in the US, where income disparities are among the highest in the world. But executive pay is still higher than that of other developing countries such as India.”
PwC’s sixth edition of ‘Executive Directors’ Remuneration’ Report shows that executive pay is being focused on from all angles, and CEOs recognise that the pay-for-performance model needs to be revisited.
All over the world companies are recognising the importance of two distinct classes of capital, namely financial and natural capital, not because they choose to, but because it is necessary for an organisation to be sustainable to survive in a complex business environment. We debate linking executive remuneration to this mix of metrics so as to promote the correct corporate behaviour. Currently this may be overshadowed by discontent about pay differentials.
The report reviews the regulatory environment around the world, as executive remuneration continues to provide rich pickings for governments and regulators. Seegers adds, “Having just had our general election, the regulators and politicians are watching closely and we should not be surprised by an increased call for regulatory intervention.”
The issue of the pay gap is gaining momentum both locally and internationally with the risk that if not properly understood and dealt with, it could result in regulatory intervention that could have undesired consequences. Employers still need to have flexibility in managing their pay structure and it would be detrimental if substantially reduced CEO and executive pay was to take place. It would be more beneficial to focus on significant interventions that will enhance the pay and financial well-being of workers.
Seegers adds, “There are no simple solutions to this complex issue. However, those tasked with influencing and determining pay at all levels within the private and public sectors should take into account a number of factors.
“These include measures to ensure that executive pay packages are reasonable relative to the markets, and that significant focus is placed on the link between pay and performance, and extremes of pay from inappropriate bonus and share plans are avoided.”
Managing shareholder engagement
As the call for shareholder engagement continues worldwide, closer to home South African shareholders are standing up and taking more notice of company governance, with executive remuneration continuing to attract the bulk of shareholder attention. When it comes to executive remuneration, 92% of investors think it is appropriate and important to engage, but 65% of directors think it is not appropriate or important. Innovative methods of shareholder communication are therefore being introduced internationally.
Total Guaranteed Packages
Globally it is now common practice that executive pay increases are in line with those of the rest of the workforce and it is anticipated that the level of executive pay will start plateauing over the next few years as shareholder engagement and pay-for-performance models become high priorities for remuneration committees. The same cannot necessarily be said for all South African organisations. While the median Total Guaranteed Pay Package (TGP) was 4.5% for the JSE as a whole for the period 1 May 2012 to 30 April 2013, in many cases, the increases were above inflation.
The median TGP for the CEOs of large-cap basic resources companies has shown a significant increase of 9.3% (R9m,) after a decline last year, and is now at a level higher than in 2011. After a period of negative increase, the median TGP for executive directors of large-cap basic resources companies has remained static at R4.9m.
The median TGP for the CEOs of large-cap companies in the financial services sector has shown a modest inflationary increase, as in the prior year (R6.6m.) The median TGP for the CFOs of large-cap companies in this sector also showed an above-inflationary increase after the decline in 2012, bringing it above the 2011 level (R3.7m.)
The median TGP for large-cap CEOs at industrial organisations showed a significant increase (R13.6m,) after a substantial decline in 2012 (R10m.)
The actual pay-out levels for short-term incentives for the reporting period fared well, with large-cap industries experiencing an increase across all roles. The most significant impact was seen in the CEO’s role for large-cap companies, where a 131% increase was experienced, compared to a 37% decline in 2012.
Profile of an executive director
The report also discloses that as at 30 April 2013 there were a total of 1 145 executives, which means there was a 12% increase in the number of executives listed as directors in 2013. Despite this increase, on closer scrutiny, it appears that a number of companies are limiting the number of executive directors sitting on boards. “This may be due to the onerous regulatory and fiduciary responsibilities contained in the new Companies Act implemented in May 2011,” explains Seegers “Directors are reticent to be held to account to the extent of personal liability for business conduct beyond their control.”
The report shows that JSE directors range in age from 29 to 93. The absolute median age across all sectors for executive directors is 52 (2013: 51) and the average is 54 (2013: 54.) The average tenure held by executives is 4.9 years which is relatively short, when compared to 3.6 years for non-executive directors which are in line with good governance as JSE listed companies follow a programme that ensures staggered rotation of non-executive directors.
The demographics of executive directors are varied across sectors and industries, with the basic resources and services sectors showing the largest proportion of ACI representatives (31%,) followed by the financial services (29%) and the industrial sector(20%.)
The report also shows that more work needs to done to achieve better representation of women on boards. Gender equality at management level has tended to remain flat at about 24% since 2009. According to the report, without proactive support at board level, in another five years, organisations may find that the percentage is still inadequate to meet legislative aims of 50/50.
Seegers says, “South African organisations are making better efforts to explain how their executives are paid, using benchmarks and models such as overall revenue, profits and share incentives to assist them.
“Companies must maintain regular, transparent and informative dialogues with their shareholders and other stakeholders in order to manage shareholders expectations. These dialogues should aim to build relationships with shareholders and stakeholders based on trust and mutual understanding.”
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