Belt tightening ahead for CEOs?

While some South African CEOs earn more than R20-million a year, the head of the country’s largest shareholder, the Public Investment Corporation (PIC), earns less than R2-million a year. This pay disparity between top executives looks set to become a contentious issue after Brian Molefe, head of the PIC, signalled that he would be paying close attention to the remuneration of company directors.

Three companies in which the PIC is a major shareholder pay their chief executives more than 10 times Molefe’s own salary. Human capital consultancy firm Mabili shows in 2005 that JD Group executive chairman David Sussman got R46,2-million in overall remuneration. Bidvest’s Brian Joffe, for example, took home R24,9-million in total in 2005. In the same year, Jacko Maree of Standard Bank received a total of R24,42-million.

Major PIC investments

The PIC owns shares in most JSE blue chip stocks. The investments include:

It also has smaller stakes in many other companies. — Source: Who Owns Whom

JD Group had a turnover for 2005 of nearly R10-billion and spent 1,67% of its after-tax profit on paying five executive directors. Bidvest’s turnover was R63-billion, and it paid its 20 executive directors 2,85% of its profit after tax. Standard Bank spent only 0,27% of its after-tax profit on executive directors, with a turnover of R29,7-billion, according to Mabili.

Molefe leads by example. His organisation controls about R600-billion in investments — a figure most CEOs would envy — but he earned a comparatively modest R1,94-million in 2005. The average South African CEO earned more than twice this amount — R5,35-million — in the same year, a 24% increase from 2004. Many of the companies that count the PIC as a major shareholder pay their executives much more than this.

The PIC, which manages the pensions of government employees, has significant stakes in most large companies. So when Molefe, the PIC’s chief executive, makes a public pronouncement, people listen. These days he’s taking a strong interest in how company boards are set up and run. First Sasol, then Barloworld, was publicly slammed for its failure to appoint black executive directors; now Molefe is signalling an interest in the fees paid to company directors.

“We would like to see some of the deliberations of the remuneration committee and the basis of the sums arrived at, so that we can be sure that it is in accordance with best practice,” he said at Barloworld’s annual general meeting last week. The company had just appointed its first black executive director and its first interim black chairperson, after a scathing attack from Molefe earlier in the week.

Executive pay is always an emotive issue. In South Africa it is receiving increased attention, helped by the JSE’s bull run, which gives CEOs generous stock options and bonuses. In a country with rampant unemployment, where half the population lives in poverty, the seven- and eight-figure salaries top business leaders earn are easily seen as excessive.

It is not always clear how companies decide on executive pay packages. In South Africa, the JSE has only required listed companies to disclose remuneration for directors since 2002. Analysts argue that pay packages often have only a tenuous link to pay, and that companies tend to remunerate their executives based on what other companies are paying, rather than what executives are worth.

Mabili, which publishes the annual Directors’ Remuneration Report, says in last year’s edition that in many cases “there seems to be a very weak link between performance and pay. Directors are given large incentives for good performance, even when the performance of the company is greatly influenced by external factors.”

Then there’s the pay gap between senior executives and average workers, “which continues to grow aggressively,” says Mabili. The firm says that because of these two issues, there is a need for greater transparency and balance.

Mabili’s research shows that even companies in the same sector paid vastly differing amounts in 2005. Truworths CEO Michael Mark received R10,25-million, double that of Woolworths CEO Simon Sussman, who got only R4,8-million. But Truworths’s turnover was R3,5-billion while Woolworths’s was R13-billion. The latter spent 1,09% of profit after tax on its three executive directors; Truworths spent 2,29% of after-tax profit on the same number of directors.

In the case of telecommunications, MTN’s turnover was R29-billion; just 0,47% of after-tax profit was spent on five executive directors and CE Phuthuma Nhleko received R23-million. Former Telkom head Sizwe Nxa­sana received R15,42-million. His company spent 1,97% of after-tax profit remunerating five executive directors and reported R37-billion in turnover.

While annual reports now disclose the total packages and break down the remuneration directors receive, the discussions of remuneration committees are not usually made public. But the PIC, often the single largest shareholder in companies, has the power to change this in many instances. This would allow shareholders to assess the proposed annual increases of directors and decide whether they are justified.