By Laurence Grubb and Mary-Anne Williams
The conflict surrounding executives’ pay in South Africa reflects a complex interplay of diverse interests among various stakeholders, including the media, general society, shareholders, government, executives themselves, and boards with remuneration committees.
The term "excessive pay" lacks a recognised definition and is susceptible to subjective interpretation. Excessive can, therefore, encompass any figure. This is why it is important for companies to be transparent and provide the details of how they remunerate and what makes up the pay package, especially with respect to the link to performance and the period related to the pay.
Executive pay comprises guaranteed pay (base pay and benefits) and variable pay (short- and long- term incentives). Variable pay payouts are an indication that the executive has met or exceeded their performance targets. Thus, it is imperative to be transparent when explaining significant pay components and whether they result from a large base pay or performance-based incentives. Occasionally, buy-in packages and separation agreements inflate remuneration; these payouts are anomalies and cause concern for shareholders.
Link to Performance
Pay for performance is not isolated to executives, research shows that high-performing companies have good performance management and link performance to remuneration.
The principle-agent theory requires that the Board ensures that the executive remuneration is aligned with the company strategy and the objectives, aligns their interests with those of the stakeholders. This places the executive in a position to act within the best interest of the company and ensure that the company is managed in a sustainable and responsible manner which benefits all the stakeholders.
Our South African boards are tasked with taking care of all the stakeholders and not just the shareholders. If this is implemented properly, then all stakeholders are to benefit from the decisions made by the board.
What would the stakeholders prefer: executives that are perhaps overpaid and run the company successfully or poor performing executives that destroy value and yet earn the right amount or less?
Skilled executives are not a dime a dozen, especially not good ones. According to an article published by Business Day, 41 executives have resigned from their positions in companies listed on the JSE in the past 16 months. The South African market has noted a major increase in loss of skills due to immigration.
Companies are having to search outside of South Africa to find executives with the required skills, global experience, and track record, in these circumstances. Remco’s are having to engage in benchmarking beyond the borders of South Africa to retain and attract executives.
Excessive restrictions or limitations on executive pay could increase the flight of skills, increasing the talent shortage and inadvertently driving the executive pay higher and even worse ending up with executives that are not able to successfully run companies.
A major proponent of the issues surrounding “excessive pay” is the wage gap. The proposed amendments to the Companies Act suggest more rigorous disclosure on executive pay and how it relates to the lowest wage earners in the company. The assumption is that these disclosures will ensure a stricter handle on executive pay. While these disclosures may lead to an increase in the wages of the lowest paid, it can inadvertently lead to outsourcing these lower paid positions all together.
The wage gap is not the most significant issue that faces our country or economy. Unemployment is by far the greater evil. The pay gap is a private enterprise issue, while unemployed is the government’s responsibility. The most effective way to increase the wages for the lowest level employees is to ensure they have the best education and skills which requires a major change to our education system.
A reputation of bad governance has serious implications for a company. Good governance requires a framework and process for ethical decision-making, that is transparent, and promotes accountability. The implementation of concepts such as a malus and claw-back policy, Minimum Shareholding Requirement (MSR), internal succession planning, share retention post-employment can contribute to effective governance in the scope of executive pay. The SEC in the USA have made clawback compulsory and not at the discretion of the Board.
Media plays a pivotal role in shaping public perceptions of executives. Sensationalism and exaggeration can distort reality, leading to the actions of a few being perceived as the majority. It's important to navigate media portrayals with a balanced perspective.
There is no doubt that poverty is a huge issue in South Africa but is this due to executive pay or poor education, corruption, poor economic policy and maladministration.
To conclude, executive pay is nuanced, and influenced by market/economic pressures, shareholder expectations, consumerism, globalisation, and fierce competition. Understanding and addressing these dynamics are essential for fostering a balanced and effective executive remuneration structure.
Adherence to governance structures, not just as a legislative requirement but as an ethical principle, must be linked to performance for transparent communication.
Laurence Grubb, master reward specialist, South African Reward Association Executive Committee member and Mary-Anne Williams