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, [email protected], 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 ​​​​​​​​​

Media reports are currently questioning the appropriateness, and even legality, of mooted payments to terminate the contracts to two City of Cape Town executives. Details are still sketchy, but it appears that councillors were being asked to consider the payments, which run into millions, in a closed-door session last night. 

“Juicy press stories aside, we need to keep an open mind on the topic until there is greater clarity on what actually is going on,” says Dr Mark Bussin, Executive Committee Member at the South African Reward Association (SARA) and Chairman of 21st Century . “However, there are some important principles that should inform the debate.”

One is that King III makes it clear that it is undesirable to pay out executives accused of misdemeanours or underperformance just to get rid of them. If executives don’t perform to expectation, or are accused of wrongdoing, they should not be paid (paragraphs 161 and 162 under Principle 2.25). Of course, companies frequently make use of this approach to avoid the reputational and legal fallout from a dispute, but it contradicts the principle that executives should be remunerated fairly and responsibly. 

In this case, there is no indication that these particular payments were made to get rid of the executives for these reasons. Rather, according to a report in the Cape Times, the move was being made in pursuance of the City’s Organisation Development and Transformation Plan, which is a legislative requirement. 

“If the two contracts are being terminated simply in order to make way for appointments in line with the Plan; for example, affirmative action appointments, then the motivation for the pay-outs seems understandable and, in the broader scheme of things, the amounts do not look excessive,” says Dr Bussin. “However, this is public money so it is critical that the procedure followed to arrive at the amounts is both fair and transparent—any suggestion of a cover-up, no matter if it’s unwarranted, will give rise to speculation. Hopefully, the mayor will issue a comprehensive statement sooner rather than later.”

ENDS
​
MEDIA CONTACT: Cathlen Fourie, 012 644 2833, [email protected], 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 ​​​​​​