![]() Executive remuneration has become a symbol of inequality in today’s global economic order. Shareholders are becoming more active in demanding that executive pay is more closely linked to results and stakeholders want a broader focus on the context in which the organisation operates. For example, Anglo American recently responded to investor criticism of its executive remuneration policy by announcing it would revise its policy. It seems excessive executive reward will continue to attract push-back from investors. As a result, says Ray Harraway, Chair of the Remuneration Committee Forum of the Institute of Directors in Southern Africa (IoDSA), the work of the remuneration committee is critical to a company’s social licence to operate, and thus its sustainability. Speaking after the launch of the Remuneration Committee Forum’s position paper on fair and responsible remuneration recently, Mr Harraway said that getting remuneration right is not easy. “There are no right or wrong answers, there is no ‘number’ that a consultant can provide you with,” he pointed out. “What’s needed is professional judgement exercised within the context of the organisation and the society in which it operates. I fear that many remuneration committees do not have the skills, or courage, needed to make the right decisions.” The position paper addresses many of the deep questions that remuneration committee members must ask themselves. They include why remuneration should be fair and responsible in the first place, and what the difference between “fair” and “responsible” actually is. A particularly contentious area is the wage gap within organisations. The paper argues that using pay ratios is ultimately not helpful when trying to come to grips with it. The main reason is that the ratio is significantly affected by the organisational structure of the company. For example, a company with both a COO and a CEO would have a better pay ratio than one with just a CEO, while a company that outsources lower level jobs could have a lower pay ratio than a competitor that does not. Similarly, a bank that has more high-skilled workers would have a lower pay ratio than a miner or retailer with large numbers of low-skilled workers. A better tool could be a pay index which tracks CEO pay, median employee pay and the total shareholder revenue of the company in question. “An important recommendation in King IV is that the remuneration of executive management should be fair and responsible in the context of overall employee remuneration. It should be disclosed how this has been addressed,” says Parmi Natesan, Executive, Centre for Corporate Governance, IoDSA. The problem with pay ratios is part of the larger one of mindlessly using benchmarks to set pay levels. A much better approach, Mr Harraway argues, is for remuneration committees to develop their own methodology but be prepared to communicate its thinking clearly. In general, remuneration committees must effectively communicate their thinking to all stakeholders. Such an approach actually goes a long way towards resolving concerns about fairness. To do so, it is vital that remuneration committee members understand the company’s strategy and how it creates value, in order to link value creation to pay. “This paper positions company directors and remuneration committee members well to rise to the challenge of one of the most vexing but important questions facing governing bodies today,” says Joanne Henstock, EY Executive Director and Remuneration Committee Forum member. This guidance provides critical assistance for boards in Southern Africa, where we continue to experience the challenging effects of a deficit of professional directors and mature board leadership skills.” “Fair and responsible pay” can be downloaded by visiting http://bit.ly/2mUYROy ENDS MEDIA CONTACT: Cathlen Fourie, 082 222 9198, [email protected], www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: The Institute of Directors in Southern Africa
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![]() The Institute of Directors in Southern Africa’s (IoDSA) Remuneration Committee Forum has released its fifth position paper called “Value creation and executive pay” on the practical measures that boards should take in order to link executive pay with the value they create for the company and all its stakeholders. “Executive pay is one the most visible and criticised aspects of corporate governance,” says Ray Harraway, Director: Remuneration Services at EY and Chair of the Remuneration Committee Forum. “I don’t think anybody really objects to high executive pay so long as it is directly linked to the value that executives create for the company and its stakeholders. However, getting the link between pay and performance right is extremely difficult, and that’s the issue this paper aims to address.” At the heart of this problem is the difficulty in understanding value creation. Before anything sensible can be said about executive remuneration, boards and their remuneration committees have to understand what, for the organisation, constitutes value—and how the company creates value. Once that is understood, the remuneration committee can begin to establish what the desired outcomes are, and what drivers are important in achieving them. A major stumbling block is that, according to 2013 research by McKinsey, only 34 percent of directors surveyed agreed that the boards they served on fully understand their companies’ strategies. Such an understanding is a prerequisite for understanding what value creation looks like and thus, ultimately, how executives should be incentivised. Overemphasis on outcomes at the expense of drivers is one of the common shortfalls of executive incentive schemes, Harraway says. Outcomes may take years to achieve, so they are an inadequate measure of executive performance over the short term, whereas drivers—those actions that lead to the desired outcome—can be better indicators of progress in the short term. To be effective, incentive schemes need to be multifaceted. Both outcomes and drivers should play a role in the design of the schemes, as should a balance of short-term financial performance and long-term sustainability. Thus, for example, while a rise in the annual share price is obviously important, it should not be at the cost of investment in R&D and training, which are vital to the company’s long-term sustainability. And profitability cannot be the sole financial measure used—the return on capital has to form part of the equation when assessing executive performance and how it contributes value creation. Parmi Natesan, Executive Director at the IoDSA and a member of the King IV drafting team, adds that one of the fundamental shifts in King IV is to make the performance/value creation aspect of governance more explicit. “Setting remuneration levels is never going to be an easy exercise, and nor will it ever be a simple matching of actions and results, so the remuneration committee will always need a certain amount of business acumen as well as discretion. Nonetheless, if the value-creation levers are well understood, the committee will be better placed to incentivise the right kind of executive behaviour,’ says Harraway. “For instance, if there is a conflict between actions that might result in lower profits in the short term but are likely to drive long-term value, the incentives should default in favour of the latter.” The paper “Executive pay and value creation pay” can be downloaded by visiting http://bit.ly/29jnAG6 ENDS MEDIA CONTACT: Cathlen Fourie, 082 222 9198, [email protected], www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: The Institute of Directors in Southern Africa group ![]() The hourly rates for non-executive directors serving on boards of various sized companies are similar, but the hours required to effectively perform duties differ significantly, which impacts the total quantum. This is according to the fourth annual Non-Executive Directors’ Fees Guide launched by the Institute of Directors in Southern Africa (IoDSA) in conjunction with EY. The Guide is designed to give companies a guidance for setting non-executive directors’ fees, the time commitment, and number of meetings appropriate to their specific needs. The Guide also indicates the average size of the various board committees. Other important and useful information includes the factors driving fee increases for non-executive directors, supplementary fees, expenses and/or benefits provided for them, and how companies structure fees for their board members. “Non-executive directors have a critical governance role to play, and they bear the same level of risk as executive directors in terms of the Companies Act. The conversation around the fees should therefore never overshadow the focus on the bigger picture – appointments resulting in a balanced and competent board,” says Parmi Natesan, Executive: Centre for Corporate Governance at the IoDSA. At the most general level, she notes, non-executive directors are chosen to provide objective criticism and advice, but they are also valued for the business experience they bring to the board – experience that could help make the company’s success more likely. Increasingly, too, directors with specific skills are sought to complement the skills already offered by other directors, both executive and non-executive. “Choosing, managing and rewarding non-executive directors with the right skills is essential to creating boards that have the right mix of skills to make a difference,” Natesan says. “To attract the right individuals, therefore, companies need to be sure that they are paying competitive rates – and receiving good value from their non-executive board members.” Natesan points out that non-executive directors’ fees are not intended simply to cover their attendance at meetings, but also the time commitments for preparation and follow up as well as to stay up to date with developments within the company. “The Guide will help directors and potential directors to benchmark these time commitments. It will naturally also help Boards to propose realistic and competitive fees for shareholder approval,” says Ray Harraway, director at EY and Chairman of the IoDSA’s remuneration committee forum. “A company’s directors are the ultimate custodians of the shareholders’ investment and their important role is now well regulated. In parallel, all directors are vulnerable to risk and liability– companies need to reward them appropriately for the increased time and effort the role demands. Benchmarking is an essential tool in doing so, and thus in creating an effective board.” The Guide can be downloaded from http://bit.ly/NEDfees2016 ENDS MEDIA CONTACT: Cathlen Fourie, 082 222 9198, [email protected], www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: The Institute of Directors in Southern Africa group ![]() Acting in the best interest of the company is central to enabling remuneration committees (Remco) to make better decisions. That’s according to the Remuneration Committee Forum, a forum of the Institute of Directors in Southern Africa (IoDSA), sponsored by EY in its latest position paper* on Managing Conflicts and Tensions in the remuneration committee. According to forum chair, EY’s Ray Harraway, “Doing what will best serve the interests of the company on whose board you’re serving is perhaps the most important principle when it comes to making better remuneration decisions. This ‘golden rule’ also lies at the heart of three key factors which, when present in remuneration committees, enable them to make quality remuneration decisions. Three factors that contribute towards effective remuneration committees Composition of the remuneration committee Remuneration committees can only truly be regarded as effective if they are composed of independent directors who are tasked with implementing an effective mandate. “Such a committee would ideally be composed of at least three non-executive directors, a majority of whom should be the independent non-executive directors,” says Harraway. “This composition enables the committee to more easily operate independently from management and is, I believe, the most effective way to reduce and manage conflicts of interest and tensions within the committee.” Beyond this, he says independent directors need to have the guts and integrity to challenge the views of management. “However, this requires the directors to have a comprehensive understanding of the business, as well as the skills needed to assess the fairness of, for example, the performance measures used in bonus targets.” Engaged shareholders Another factor in arriving at quality remuneration decisions is a plan that promotes effective engagement with shareholders. “Although such a plan is different for each company, it must drive transparency, disclosure and effective relationships, without which it will be impossible to make good decisions.” Remuneration system Thirdly, the information that helps shape remuneration decisions is only as good as the remuneration system that such information is drawn from. “If, for example, the job evaluation process or the strategy to manage reward is flawed in some way, the result will not be satisfactory, no matter how diligently the Remco members apply their policies. Each decision needs to be weighed considering whether or not it is in the best interests of the company.” Tensions within remuneration committees Non-executive fees One of the major tensions within remuneration committees that the paper focuses on is the question of the remuneration committee members being inherently conflicted when determining non-executive director fees. One of the recommendations made is that the executive directors be involved in determining the fees, rather than simply depending on benchmark information on fees. “This is a good strategy since it removes to a great extent the question of conflict of interest,” says Harraway. Measuring company performance Another area where tension often arises is where bonus targets are set based on internal measures of company performance. “Where a bonus plan hinges on profit targets, a weak Remco, without the right skills or information, will not be able to effectively challenge the numbers, and the required stretch in the targets,” he says. “It comes down to the business acumen of the individual members, which explains why Remco members are beginning to see their fees increase - even coming in line with audit committees fees.” Representative Directors Another difficult area concerns representative directors in a group situation. “Much difficulty may result when it comes to the exchange of information,” he says. “Here, King III advises drawing up a governance framework with some good legal advice – yet nothing is a substitute for prevailing upon Remco members to act with integrity, in the best interests of the company, regardless of who has appointed them to the board.” As a good steward of the company, the paper concludes that it’s up to each member of the remuneration committee to discharge the following moral duties: conscience (acting in the best interest of the company, avoiding conflicts of interest); inclusivity (taking into account the legitimate interests of stakeholders); competence (a director needs to ensure he has the knowledge and skills needed to play his role effectively); commitment and courage to act with integrity. *The paper provides practical guidance on managing specific conflicts of interest and tensions that arise at the remuneration committee. (Available at www.iodsa.co.za/resources, it should be read together with the King III Code and Report on Corporate Governance and its related Practice notes.) ENDS MEDIA CONTACT: Cathlen Fourie, 012 664 2833, [email protected] For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: The Institute of Directors in Southern Africa group |
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