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
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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 |
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