Executive’s pay has come under scrutiny after a report titled ‘Shareholder Alignment, Company Performance and Executive Pay’ was released by Deloitte earlier this week. Addressing inequality is an important national imperative and we support it wholeheartedly. Unemployment is at unacceptably high levels and as a nation, we need to do everything possible to create jobs. However, it is necessary to contextualise executive pay.
When reporting on executive pay increases, it is important to consider one executive at a time. Using this approach, we believe that executive remuneration increases have been on par and in most instances lower than the general workforce. Organisations have adopted this approach in an attempt to close the wage gap. If the Top 100 CEO’s or CFO’s remuneration is considered as a group, the increase in the remuneration will be impacted on by CEO’s and CFO’s who have left and the new ones appointed often at premiums to “buy” them. This is also true for public service and public office bearers who have over the past several years taken smaller pay increases than lower level workers in order to address the pay gap ratio.
The allegation that executive pay is misaligned with performance is not true, even based on the author’s own research. Total Annual Cash growth and shareholder value growth is in our view closely aligned over the period. It is not aligned with HEPS growth, but that is due to the economic downturn in the final year which is reflected immediately in HEPS. What is even more compelling is the Total Remuneration of executives (including LTI’s), which is the most holistic measure of actual pay, has gone up much less than the investment returns. This allegation is thus wrong even on their own data and may be based on cherry picking measures.
Strengthening the link and evidence between organisation, individual executive performance and executive pay is high on the agenda of most Remuneration Committees. When analysing and substantiating this link, several measures of organisational performance can be used. There are different views as to the most appropriate measures, and certain measures are more applicable in certain industries. In the South African Reward Association library, there are several research reports that take on average 8 organisation performance measures and correlate them to CEO contribution and remuneration. Generally, several measures correlate positively and one or two may not correlate. From this, one should not take the one or two that don’t correlate and conclude that there is no correlation between CEO performance, pay and organisation performance. Care needs to be taken to arrive at the correct conclusion between organisation performance and executive pay.
We believe that the corporate governance processes in South Africa are, broadly speaking, working well. Arresting the pay gap ratio is something that we all need to work harder at. There are many ways to address this. Education is pivotal to this approach because higher skills leads to more skilled work, better productivity and better pay. Halving CEO pay will not address the problem. With the ever increasing regulatory and governance environment and increasing complexity of running a business, CEO’s are commanding higher salaries. This needs to be carefully balanced with the pay gap ratio. The gap between the unemployed and the lowest level worker is infinite.
Unemployment is our biggest problem. Let’s not ignore the wage gap but more importantly make sure whatever we do does not result in more unemployed. Institutional investors also need to come to the party and resist demanding ever higher returns from CEO’s which in turn exacerbate the pay gap ratio. As a Nation, we all need to address this problem collectively, and responsible reporting is also part of this solution.
SARA is a professional body aimed at promoting the reward profession and practices. While setting minimum standards for the industry, we award professional status to eligible members in various reward categories and create knowledge-building, sharing and networking opportunities for our members and those operating in our industry. We do this to promote and develop the reward industry and to ensure sound reward management practices and acceptable standards.
As a professional body, we support strong and robust corporate governance, especially when it comes to remuneration. Strong media and shareholder activism goes a long way in supporting better governance and we are in support of both approaches to strengthen current codes of practice for example King IV, Sarbanes Oxley, Basel and Pillar frameworks and stock exchange requirements.
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