Remuneration is a shareholder issue

Government involvement in executive remuneration will have unintended consequences, says Laurence Grubb, Executive Committee Member at the South African Reward Association (SARA) and Managing Director at Khokhela Consulting.

Executive pay is a perennial hot topic in today’s media, particularly in the context of growing inequality. Unsurprisingly, it has found its way into governance codes like the King Report. There is even talk of governments getting involved in regulating executive pay, presumably in the interests of social cohesion. Whatever the reason, government involvement in what is a private, corporate matter should be vigorously resisted; shareholders have invested their money in a company and it is they who should be controlling how its executives are rewarded, and thus incentivised to perform. 

In cases where governments have attempted to intervene they have backfired. In the wake of the 2008 financial crisis, the European Union imposed a cap on bonuses for bankers. Banks simply increased the guaranteed pay and/or created a new category of variable pay called an “allowance” rather than a “bonus”. This has negatively affected the desired link between performance and reward.

Indeed, corporate governance codes and practices are leading to better solutions to the challenge. While they are perhaps not yet perfect—and may perhaps never be—considerable progress is being made as the business world builds up experience in this area. 

At the outset, it is perhaps worth noting that the common view that all executives are overpaid is simply not true. In fact, many remuneration committees are creating and implementing good remuneration policies which consider all stakeholders. Companies are in business to make a profit, so overpaying executives is hardly likely to appeal to them. 

So what are the current developments in corporate governance aimed at refining remuneration? And what are the issues?

Perhaps the biggest trend—evident in King III and judging from the draft in the King IV™ Report on Corporate Governance for South Africa 2016 issued by the Institute of Directors Southern Africa—is the concept of a shareholder vote on both the remuneration policy and its implementation. There are many variations. In Australia, for example, if a corporate remuneration policy receives a lower-than-75-percent vote at three consecutive AGMs, the board is forced to resign. The most common pattern is for the remuneration policy to be subject to a vote at intervals (two- or three-year intervals are common), with the implementation of the policy the subject of an annual vote. 

Obviously, it is impossible for the implementation vote to be binding—in the very nature of things, employment contracts cannot be delayed until the AGM. However, the question of whether the vote on the remuneration policy should be binding or not remains moot. The King approach has been to make it non-binding, but to make it a requirement for companies to “engage with” those who voted against the policy. 

It might seem that a binding vote on the remuneration policy makes sense, but there is always the risk that a group of minority shareholders could use the vote to further another agenda by effectively expressing a lack of confidence in the board. It may also not necessarily be an effective way to curb excessive executive pay: Switzerland has such a binding vote on remuneration policy, but its CEOs are the best-paid in Europe.

While we do not yet know what the final recommendations of the King IV™ Report, due to be released by the Institute of Directors in Southern Africa on 1 November 2016, will be, it seems certain that South Africa will remain loyal to the principle of a non-binding vote on remuneration policy, probably every two years, but with an obligation to deal with shareholder concerns. On balance, this seems sensible because it keeps the door open to a negotiated solution.

To conclude though, one must highlight a potential issue when it comes to the effectiveness of shareholder voting on such important issues. This is that the bulk of shareholder votes are controlled by third parties, the huge institutions who invest on behalf of individuals. They are often short of resources that are required to analyse policy issues carefully, and they are also not directly concerned with the company in the way that the original type of shareholder was. The original link between the provider of the funds, the board as an agent for the funder and the executives has therefore stretched to the point where some creative thinking is required to bridge this gap. 

This caveat aside, governance standards built on consensus and best practice are most likely to yield results, while regulatory intervention will simply be counterproductive.

ENDS
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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 ​​​​​​​​​

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