Recent reports of shareholders voting against executive remuneration structures have again highlighted the need for increased transparency in the disclosure of not only the amounts paid, but how the amounts were calculated and the link to performance. Many companies have made significant progress with the disclosure of executive pay and the quality and content of remuneration policies and implementation reports.
However, the improved transparency of certain excessive executive pay packages has also fuelled the perception that all executives are paid exorbitant amounts of money, causing an ever increasing pay gap. Laurence Grubb, Master Reward Specialist and executive committee member of the South African Reward Association (SARA), says a handful of executives are still able to manipulate remuneration committees, despite notable efforts to follow the principles set out in King IV and the association’s guidelines. Committees agree to targets which are a little too soft or potential remuneration that is out of line with industry. “Although these executives are in the minority, it remains a concern and needs to be contained.” Independent advice needed Grubb says remuneration committees should be entitled to obtain independent advice from their own remuneration consultants to validate what has been presented to them by the executives. The cost for this service should be borne by the company. SARA published guidelines on the drafting of a remuneration policy and the implementation report at the beginning of the year which follows the principles set out in King IV. Some ‘old’ long term incentive schemes may have awards which were not linked to performance. Those shares may now be vesting, and with no performance linked to them, it is quite possible that shareholders will vote against such schemes. Grubb says companies need to confirm the performance criteria for vesting before making any awards for long term incentives. Failing to do so, will undoubtedly annoy shareholders. Barclays Africa experienced this first hand when shareholders voted against the company’s policy and implementation report earlier this month (May 2018). In terms of the King IV principle on remuneration, the policy should record the measures that the board commits to when 25% of the votes are exercised against either the remuneration policy or the implementation report, or both. These actions should then be communicated in the background statement in the following year. South Africa is the only country in which the threshold for these remedial measures is as low as 25%. In Australia, the UK and Belgium, among others, remedial measures are only mandated if 50% or more of the votes are cast against the remuneration policy and implementation report. Pay gap realities The pay gap in South Africa remains a burning issue, although companies have been trying to address it by offering larger annual increases for lower level workers and smaller increases at executive level. However, an increase of 5% on R2 million will always make a bigger gap than 8% on R100, 000. Several companies have also introduced the minimum wage, and in some instances, wages which exceed the minimum wage. In countries where the pay gap is much narrower, the level of skills, education and productivity of the lower end workers are much higher than in South Africa. Grubb says companies operating in those countries are typically able to pay much higher rates to their lower level employees because of the higher skills and productivity levels. “Unfortunately, in countries where education is severally limited and not at the right standard, the impact is felt mostly by those whose skills and level of education do not offer them the opportunity to increase their earning potential.” Companies find it difficult to continually pay higher salaries to lower levels and, inevitably where that does happen, there are job losses.
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![]() Recent reports have highlighted the disparity in remuneration between CEOs and workers. Consequently, many commentators have questioned the fairness of executive packages, calling for greater regulation of those salaries and benefits. According to Dr Mark Bussin, Executive Committee Member of the South African Reward Association (SARA), this is a problem domain ideally suited to the Reward Specialist. “First,” says Dr Bussin, “one must understand how remuneration is determined at various levels.” General workers For general workers, a fair wage is decided through collective bargaining, striking a balance between what employers can afford and trade union negotiators are willing to accept. “It’s notable that recent increases have been in the 7% to 8% range - higher than CEOs,” reports Dr Bussin. “Companies, aware of the pay gap, it seems, are trying to close it.” Salaried staff For salaried staff, various factors are considered, including salary surveys, inflation, education, personal performance, and the scarcity of an employee’s skills. “Ultimately,” says Dr Bussin, “the finance department budgets for an overall payroll increase in line with inflation, currently around 6%.” CEOs and directors Executive salaries are more complex. Dr Bussin explains that CEOs and directors face much higher pressure than other employees. “Their track record for leading companies successfully in the face of overwhelming personal risk is why they’re engaged. As such, they command commensurate reward.” They’re usually compensated in two ways. Fixed pay Executive officers get a fixed salary that is mainly determined by benchmarking. This includes salary surveys and comparative studies of companies of similar size and complexity. Their pay in relation to these measurements will depend on the organisation’s remuneration policies. Variable pay Executive officers also receive short-term and long-term incentives. Short-term incentives are based on performance targets that, if achieved, usually result in a reward of between 50% to 100% of fixed annual salary. Long-term incentives, linked to company performance, are full shares and share appreciation - the value of the increase in share price. Pay discrepancies However, an ill-conceived remuneration package can reward even an underperforming executive officer. “These are the cases we see highlighted in the media,” observes Dr Bussin. “The perception that executives are overpaid is then generalised when, most often, their salaries are carefully formulated against industry norms.” Real or imagined, companies want to avoid any notion of biased remuneration. Dr Bussin says the King IV Report offers greater transparency by requiring executive remuneration reporting as a single total figure. “Businesses can leverage this opportunity to show that their executive officers are indeed compensated fairly.” The Reward Specialist A Reward Specialist should be engaged to ensure executive pay does not overstep the boundaries of sanity. At times, shareholders or the board may be desperate to turn a company’s fortunes around, making them bullish about a maverick hire. Here, the Reward Specialist offers an impartial perspective based on in-depth analysis. “Lastly,” concludes Dr Bussin, “Reward Specialists can create a communication plan that educates employees, shareholders and the public on company remuneration policies and executive compensation, avoiding both the reality and perception of their executives being overpaid.” ENDS MEDIA CONTACT: Carla Coetzee, carla@thatpoint.co.za, www.atthatpoint.co.za For more information on SARA please visit: Website: www.sara.co.za Twitter: @SA_reward LinkedIn: South African Reward Association Facebook: SARA – South African Reward Association 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. ENDS MEDIA CONTACT: Carla Coetzee, 072 112 8347, carla@thatpoint.co.za, www.atthatpoint.co.za For more information on SARA please visit: Website: www.sara.co.za Twitter: @SA_reward LinkedIn: South African Reward Association Facebook: SARA – South African Reward Association ![]() With South Africa Inc facing strong economic headwinds, both the private and public sectors must take a radical, creative approach to remuneration, says Dr Mark Bussin, Executive Committee Member of the South African Reward Association (SARA) and chairperson for 21st Century. “With economic growth officially in the 1 percent range, and closer to 0 percent in reality, employers and labour are going to have to face up to some tough decisions,” Dr Bussin says. “On the one hand, across-the-board increases are simply not sustainable but, on the other, the high performers in the company have to be rewarded and incentivised. In other words, our current way of thinking about wages has to change—and radically. Conditions are going to get tougher, at least for the next few years.” As a result, reward will have to be more tightly linked to performance in order to ensure that companies receive value and bloated wage bills do not threaten their long-term sustainability. Over the past several years, wage demands have borne no relation either to the company’s health, the economy or workers’ performance. This, Dr Bussin argues, is simply unsustainable. In addition, companies will have to have the freedom to selectively reward the employees who have contributed to their growth or whose skills are particularly in demand. At the same time, though, he readily accepts that those who are being paid less than a living wage—creating the unwelcome category of “in-work poverty”—need to be prioritised. However, this legitimate drive to pay workers a fair wage still has to be linked to performance. Achieving this will require an investment in training as well as focused management input. One way to pay for this special category of increases could be for highly paid executives to give up their automatic increases and bonuses. This would also be a powerful tool for building employee engagement and defusing some of the antagonism between management and labour that continues to hamstring commerce. The fact that the President and other members of the executive, members of Parliament, members of the provincial legislative, judges and others government leaders agreed not to receive increases in the 2016-17 financial year is a good example that the corporate world has signally failed to follow. “Similarly, in the public sector, we cannot go on granting automatic increases on demand. There, too, pay has to be linked to performance. Cutting the huge levels of fruitless and wasteful expenditure could actually be linked to pay-rises in the sector, giving everybody an incentive to curb this abuse,” Dr Bussin argues. “In general, all parties—labour, management and shareholders—need to accept that they are in the same boat. If the company, or the country, for that matter, goes down, then everybody goes down with it. Simply put, we all need to do things differently, to think differently. “This will require political will on the part of leaders, but there is no alternative,” he concludes. ENDS MEDIA CONTACT: Cathlen Fourie, 082 222 9198, cathlen@thatpoint.co.za, www.atthatpoint.co.za For more information on SARA please visit: Website: www.sara.co.za Twitter: @SA_reward LinkedIn: South African Reward Association Facebook: SARA – South African Reward Association By Dr Mark Bussin, |
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