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In the past 20 years or so two major trends have been unfolding in the corporate world. One is the dramatic shedding of workers’ pension liabilities and the other is the almost equally dramatic embracing of the executive remuneration liability.
In the 1980s a wealthy industry grew out of the market-honed belief that it was inappropriate for companies to carry the open-ended pension fund liability of their workers. An army of advisers became unbelievably wealthy by telling corporate executives how to dump their obligation to workers by converting their defined benefit pensions into defined contribution pensions. It would be easy to make the life-altering change seem benign. And so it was.
As a result companies are now spared the burden of pension fund liabilities and advisers became enormously wealthy not just from fees for restructuring pension funds, but also from fees for advising workers and pensioners how they could survive on their restructured pension.
A few years later, another army of advisers emerged. Remuneration consultants came to tell corporate executives how valuable they were to their companies and how their pay should be structured to reflect this value. And just as the pension fund advisers had been able to refer to free market fundamentals to justify their restructuring work, so too did remuneration consultants look to free market imperatives to justify remuneration packages that look excessive to the world outside the boardroom.
But can it be long before the two trends meet? Can it be more than a few years before the costs saved by dumping the pension liabilities of workers is matched by the costs incurred in embracing the crippling amounts paid to executives?
As was recently highlighted by the Adcock-CFR Pharmaceuticals announcement, the shares that are built into every remuneration package represent an expense that will cost the company for the rest of its life. It does not matter that the executive sells his shares as soon as he is entitled to take them up, those shares will continue to exist and will continue to require a dividend payment. In the Adcock case, if the CFR deal were to go through then executives of Tiger Brands, the previous holding company, would be entitled to a payout on Adcock shares awarded many years ago. This highlights the randomness of the executive pay industry.
So, here’s the thing. Has anybody worked out what the cumulative cost to a company is of paying dividends on all the shares that have been awarded to its executives? Probably not. The one group of people who might conduct the exercise, the remuneration consultants, know they would not be able to sell the information so they won’t bother.
Then there’s that other group of people, the institutional investor at whose encouragement the workers’ pension liability was dumped. Well, thanks to a recent report commissioned by the Code for Responsible Investing in South Africa, we know that investors will also not engage on this particular issue. In fact, according to the report, they are unlikely to engage with executives of investee companies on any issue.
Consider how ridiculous the situation has become. Anyone who is lucky enough to have a job and a pension will have placed responsibility for that pension in the hands of a pension fund manager. For the next few decades you will keep your eyes closed and your fingers crossed and hope that come retirement day, you will have enough money to survive on. You will also be hoping that your fund manager has not involved too many service providers in the chain that exists between you and the companies in which you are invested. Each one of these service providers not only comes at a cost, but creates a distance between you and the companies you are invested in.
And it is because you are not engaged that the army of guys who manage your pension fund is not really doing it on your behalf. Their first objective is to extract as much fee income from you as possible; the second is to ensure they have a “constructive” relationship with the executives of the companies in which they invest your money. Such a relationship would not withstand any vigorous questioning of executive pay.
If you are a member of a pension fund and have not engaged with your trustees, then essentially executives have you to thank for their excessive remuneration. Which is ironic given that you have executives to thank for your much slimmer defined contribution pension.