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.

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
​

​RESPONSE BY 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

Executive pay is a trigger for many media commentators and shareholder activists, but the truth is that remuneration committees (Remcos) have developed several methodologies for tackling what is a very challenging issue. Three main methodologies are used in South Africa where, in general, remuneration governance is on a par with global standards thanks to widespread adoption of the King Codes of Corporate Governance issued by the Institute of Directors in Southern Africa.
 
Each method has its own strengths and weaknesses, and reward professionals need to understand them thoroughly in order to make the right choices—particularly as the practice of naming the consultant used by the Remco is gaining traction. It is also worth emphasising that these methodologies are not watertight categories, and reward professionals will typically use elements of more than one methodology to arrive at a recommendation.
 
Market benchmarking
This is by far the most commonly used methodology in South Africa, and has the benefit of being easy to understand and of making intuitive sense. As the name implies, its basic principle is to establish what the CEOs of companies of similar size and complexity are being paid, and to use that figure as the basis for negotiation.
 
In this case, size is important because the job description of the CEO of an international bank will look very similar to that of the CEO of a four-store chain of hardware shops; the difficulty and impact of the respective jobs is clearly related to the relative size and influence of the two companies.
 
Various metrics are used to establish company size, but the most common, and most reliable, are turnover or revenue; nett profit before tax; number of employees and annual salary bill.
 
Other criteria are market capitalisation, geographic footprint and assets. Depending on the particular circumstances, there might be a case for including these last mentioned criteria, but with care. For example, the relative size of asset bases can give a very misleading picture of the difficulty of the CEO’s job. Thus, a company that owns a large amount of fixed infrastructure, such as a road or rail network, might be as large or larger than a multinational financial services company in terms of asset base —but running the latter is a much tougher job than the former, and the potential for loss is much higher.
 
This last point leads onto what is the major drawback of this methodology: it is something of a blunt instrument. Company size says a lot about the complexity and difficulty of the CEO’s job, but not everything. It should thus not be used uncritically.
 
Competitor model
This model also uses peer companies as the basis for setting the parameters of the discussion, and thus the first step has to be identifying suitable companies. The benchmarking methodology described above will obviously be helpful in this regard.
 
Having determined the right companies for comparison, this methodology compares the relative performance of the companies. Thus, a company that performs in the top quartile as compared with its competitors will pay its executives more than those of a similar company in a lower quartile of performers.
 
Obviously, company performance varies dramatically, so this methodology is perhaps most useful when used to determine the performance-related (variable) portion of the executive’s compensation package. Following a mixed model, then, benchmarking might be used to set the executive’s basic salary, while the competitor model forms the basis for establishing his or her incentives and share options.
 
Job-Sizing
This methodology is much more complex than the preceding two, and attempts to enable the reward professional to categorise the executive’s job more finely, and correlate it more closely to the rest of the market, using salary survey data. Many consultants have developed their own versions of this approach—this description will thus be as general as possible in order to identify the principles.
 
Based on research and experience, the methodology establishes the key criteria for evaluating executive positions. My own methodology, Execu-Measure, uses company size, the strategic level of the job, its impact, and its complexity and/ or requirement for problem-solving.
 
The process begins with establishing the magnitude of the job using company size. The criteria would typically correspond to the four listed in the benchmarking model above; the Execu-Measure methodology uses one of the following: number of employees, total assets or total equity/ liabilities.
 
The company sizing is the most heavily weighted factor. Once it is established, it is refined using a granular evaluation of the job itself. Execu-Measure uses three main categories, each with several sub-categories:

1. Impact of the job (direct, joint or indirect);
2. Strategic level, or freedom to act. This looks at whether the job is strategic across the whole group or at business-unit/ company level, as well as execution responsibilities; and
3. Freedom to think in the context of freedom to act. Here, the various categories are a freedom that is abstractly defined, broadly defined or well-defined. 

​All of these factors are weighted and values put into a large matrix, so that a particular job’s metrics can be cross-referenced to a single job level. The job levels correlate to those used in the various salary surveys.Thinking carefully through the methodology that is used is critical because the remuneration policy and implementation need to be defensible. It should further be noted that because there are so many factors involved, as well as the need to exercise judgement, that no formula can simply be applied. At the same time, Remcos and reward professionals should be aware that the executives will, of course, be advocating metrics and criteria that would favour higher rewards for themselves. Remuneration policies and strategies need to be robust.
 
The following guiding principles should inform the remuneration strategy and its implementation:

1. Tie pay as directly as possible to performance and value delivered to the company;
2. Use market norms as much as possible, they are a valuable benchmark. However, as noted above, it is necessary to think deeply about what market norms to use in the context of the company’s business; and
3. Impeccable governance is absolutely essential. 

It is always going to be difficult to get remuneration right, and it is unlikely that everybody will be satisfied. But with the right degree of care and thought, the reward professional can craft something that is fair, that can be defended and that, most important of all, supports the company’s strategic goals.

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 ​​​​​​​​​

Executive pay is a hot topic for shareholder and stakeholder activists, but nothing gets everybody’s blood pumping faster than a CEO who walks away from a disastrous performance with a substantial golden parachute. “Companies need to reconsider the way they handle CEO terminations to avoid arousing controversy and appearing to pay for failure,” says Martin Hopkins, Executive Committee Member at the South African Reward Association (SARA) and a partner at PWC in the People & Organisation practice.
 
For example, in 2011, executives at Hewlett-Packard, Bank of New York Mellon, Burger King and Yahoo were asked to step down and received a combined $60 million in severance packages. Hewlett-Packard’s Leo Apotheker alone received a whopping $13.2 million in cash and stock severance.  Recently, a prominent South African company paid its CEO a golden handshake in excess of R20 million following a disastrous event on his watch .
 
“We must recognise that there may be sound commercial reasons why companies take the pragmatic course of essentially paying a CEO to leave, but it is not recommended from a governance point of view because it sends the wrong message to staff and shareholders, and severs the vital link between pay and performance,” Hopkins says.
 
Principles 161 to 163 of King III make it clear that an executive who is terminated because of poor performance should suffer financial consequences in order to support a “balanced and fair remuneration policy”. Based on its draft, King IV, due to be released by the Institute of Directors in Southern Africa on 1 November 2016, will take a similar line.
 
Well-defined process required to dismiss CEO for non-performance
It is important to recognise that the issue of CEO termination pay-outs is not necessarily as clear-cut as it may initially seem. One factor to consider is that South African labour law is extremely employee-friendly; dismissing a CEO for non-performance would require a proper process to be followed. It is likely to take between one and two years to dismiss a CEO, during which time the company would be disadvantaged by having no proper leadership.
 
“It’s a process that would necessarily involve lawyers and intense media scrutiny with all the reputational and other risks that implies,” Hopkins says. “You can see why it would make business sense to shut that particular circus down, and avoid a prolonged, public washing of dirty corporate linen.”
 
Legal factors to consider
Another factor is that CEOs who are dismissed would in any event be entitled to substantial pay-outs in terms of the law. A termination package would at a minimum include notice pay, and CEO notice periods are longer than those for lesser employees—six months is best practice—plus two weeks’ salary for every year worked. Share awards that have not yet vested would also be paid out on a pro-rated basis.
 
Frequently, the notice pay would be subsumed within a “loss-of-office” payment which, while not mandated, is generally considered reasonable. Hopkins says that around one year’s salary is considered acceptable.
 
“In other words, a CEO who is being dismissed or asked to leave would anyway be leaving with a substantial sum of money based on perfectly legitimate grounds. But what must be avoided is any implication that executives are not subject to the same strictures as other employees, who are penalised for poor performance. Such perceptions damage the notion that the company is run fairly, and break down the trust that is essential for sustainable profitability. It also means that successful executives who are moving on prematurely for other reasons, are by implication tarred with the same brush.
 
“All employees, including CEOs, need to be treated fairly but it may be time for companies to bite the bullet and go through due legal disciplinary processes leading to dismissal in the case of poor performance of senior executives,” Hopkins 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 ​​​​​​​​​

The South African Reward Association (SARA) welcomes the decision made by Minister Lynne Brown on suspending the remuneration increases of the Eskom executives. 

“We are all in the same boat and brand South Africa needs to be repaired. This can be achieved via many vehicles, one of which is better labour-management-government relations,” says Dr Mark Bussin, Executive Committee member at SARA. “As much as we welcome labour’s call for a balance between excessive wage demands and job security, we welcome Minister Brown's intervention on pay increases for executives. This is an opportunity for all to contribute to brand SA.”

“We acknowledge executive leadership’s conundrum of retaining and motivating top specialists and staff who achieve their business targets.  When done though, we need to get better at showing the link between these pay increases and bonuses and the contribution made. Strengthening the link between executive and company performance, individual contribution and customer satisfaction and clear communication to stakeholders on these issues will go a long way to better understanding and relationships.”

Audio file caption: Dr Mark Bussin, Executive Committee member at the South African Reward Association, says it is important that communication is stepped up in order to better understand the link between pay and performance. To listen to the audio file, please visit this Dropbox link

ENDS
​
MEDIA CONTACT: Cathlen Fourie, 012 644 2833, 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 ​​​

Recent reports of Eskom executives awarding themselves R6 million bonus per person from a pool of R1.7bn has left a sour taste in the mouths of The National Union of Mineworkers (NUM). However, according to Dr Mark Bussin, exco member of the South African Reward Association (SARA), there are always two sides to a story.

The trade unions are facing members on a daily basis regarding how tough it is to come out on one’s salary. “I think it is the next big wave to hit us – in work poverty (IWP). It affects more than half our workforce. People are struggling to come out on their salaries and they don’t understand what executives do to earn their millions. It causes resentment and anger amongst workers and creates a platform for radical elements, radical political parties and radical politicians,” says Dr Bussin.

On the other hand, executives are under continual scrutiny, pressure, risk and forever increasing fiduciary responsibility. It is governance and onerous fiduciary duties that drives executive pay up and up. In Eskom’s case, they do run their business as a business should be run. However, with political interference setting unrealistic political goals and targets, it can put Eskom into the red. This is not entirely the Executive’s fault. Their original budget showed a profit, but the politicians, for example, instructed the electrification of several voter areas and they made a loss – not exactly their fault.

“However, as right as the bonuses seem to the Eskom executives, there is a new word that I have coined called – the “optics” of remuneration. With rotating executives, blackouts, Medupi and general negative press – the optics don’t seem right to earn millions in bonus. This calls for wisdom and sensitivity on the part of Eskom executives. Accepting the millions is contentious and should be declined. Regardless of how lawful or technically correct the bonus calculation is. The optics aren’t right.”

ENDS
​
MEDIA CONTACT: Cathlen Fourie, 012 644 2833, 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 ​

Establishing the parameters of executive compensation within an organisation is a complex task. The board needs to craft a package which is in line with business strategy and performance and which is of significant value to the executive, or there is a risk that value is lost by both. Compensation is a tool which can be managed to align company success with executive deliverables so as to benefit the bottom line and inspire business executive performance.

Reward expert, Laurence Grubb, Exco member of the South African Reward Association (SARA) explains: “There are three basic types of long term incentive schemes which align shareholders and executive interests and work best over a period of between three to five years.”

Performance share/unit scheme
This type of scheme offers the executive shares or ‘full value’ units which are linked to the value of the company. The total value of the shares or units offered is aligned to the value of the executive’s package. When these vest (become available to the executive), the performance of the company is compared to the performance objectives set at the time they were offered and this determines the number of shares or units that vest and the executive receives the full value.

“The executive is therefore driven to improve the share price or unit value and to ensure the company meets or exceeds the performance objectives set,” explains Grubb.

Share option/appreciation unit/rights scheme
This is similar to the previous scheme but instead of full value units, the executive is offered options/units/rights where they benefit from only the growth in the value. So they only receive the difference between the value at vesting and the value at commencement. There may be performance objectives attached to the vesting or a hurdle, such as a minimum level of company performance, below which nothing vests.

These schemes should ignite executive commitment as benefits are closely tied to the success of the business. “The challenge with this type of solution is that the share price can be impacted by factors outside of the executive’s control and it can be tricky to set the performance measures today for market conditions and organisational objectives in three to five years,” says Grubb.

Share Purchase Schemes
“The third type of scheme aligns executive interest with shareholder interest. Executives are asked to invest their own money into shares so they are completely engaged with the shareholder vision.”

“The ways in which the schemes are structured depend on who the shareholders are and what they prefer, the executives and the expertise within,” says Grubb. “Some companies have their own reward departments with specialists on board to advise them. In other instances executives seek the expertise of outside consultants on how best to construct and manage their packages. In both cases it is essential that the final package align with company strategy and ensure executive buy-in.”

“Linking incentive to reward and reward to performance is an art form and many companies and reward specialists spend a good deal of time and effort in identifying and implementing the best solutions for their business,” concludes Grubb. “You need to define performance and establish which measures – financial and other – evaluate that performance. Companies need to be focusing on making sure that performance criteria are well-defined and that they are as relevant in five years as they are today.”

ENDS
​
MEDIA CONTACT: Cathlen Fourie, 012 644 2833, 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

“If an organisation selects the wrong performance measures there will not be a link between CEO long term incentive (LTI) pay and company performance,” warned Chris Blair, CEO of 21st Century.
 
According to Blair, who addressed reward professionals at the recent annual conference of the South African Reward Association (SARA), the issue is not necessarily the pay to performance ratio, but rather how performance is measured. Businesses must find a way of ensuring that performance is assessed in accordance with its unique situation and industry and not try to fit a round performance peg into a square remuneration hole.

Insight into impact
21st Century, a remuneration and reward consultancy based in South Africa, undertook a survey to determine definitive, statistically tested answers as to which financial measures most closely correlate with CEO LTI pay in South Africa. The survey examined 254 listed companies and ensured a spread over five industries – transformative, extractive, distributive, professional services and personal services.
 
“The results were analysed to determine which of 11 selected financial indicators of company performance were the most in use and across which industries, and which had positive correlations with CEO LTI pay across these industries in South Africa” says Blair.
The transformative (construction, building, utilities, energy and manufacturing) and extractive (agriculture, paper, mining oil and gas ) industries were more likely to offer rewards that correlated positively with company performance when using performance measures such as earnings before interest, tax and depreciation, fixed assets and profit after interest and tax.
 
The distributive (transportation, logistics, communication, wholesale and retail) industry showed a positive correlation between CEO LTI pay and financial measures such as capital employed and profit after interest and tax.
 
The study found no reasonable correlation between the chosen financial measures and CEO LTI pay in the professional services (banking, finance, insurance, real estate, engineering) industry.
 
Finally, in the personal services industry (domestic services, hotels, repair, entertainment and leisure), a positive correlation was found between CEO LTI pay and capital employed, change in share price and Total Shareholder Return measures.
 
“The study clearly showed which financial measures had a positive correlation with CEO LTI pay and business performance as well as those that had no correlation or showed inconclusive results,” concluded Blair. “It also shows that executive remuneration needs to be more closely connected to company results and performance and that identifying this connection can be different for each industry and organisation. One benchmark does not fit all.”

ENDS
​
MEDIA CONTACT: Cathlen Fourie, 012 644 2833, 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