How executives’ salaries for listed companies are structured

The gap between South Africa’s highest and lowest earners is widening, exacerbating the contentious issue of executives’ remuneration in a country rated the most unequal in the world, which has an unemployment rate of 34.5%, the highest among industrialised nations. 

The issue of executive pay and the remuneration committees that set them has recently reared its head at the country’s largest miner, Sibanye-Stillwater, and banking giant Capitec. At the most recent shareholder meetings of both companies, shareholders voted against the implementation of the remuneration report. 

But how are executives’ remuneration determined? 

Melody Kozah, a researcher at nonprofit shareholder activism organisation Just Share, said that technically the board of a listed company appoints a remuneration committee tasked with determining the appropriate remuneration. 

But remuneration committees often delegate some of the responsibilities to remuneration consultants, who advise boards and executives on how their pay packages should be structured. 

Executive remuneration usually consists of: guaranteed pay, short-term incentives and long-term incentives. Both short- and long-term incentives are variable and — in theory — correlate with a company’s financial (and sometimes social and environmental) performance. 

The guaranteed pay is made up of a fixed salary and other benefits, which vary from company to company, such as retirement or pension benefits, medical aid and death or disability benefits. 

Sibanye-Stillwater’s chief executive, Neal Froneman, who has recently come under fire for his R300-million pay package for 2021. His basic salary was R12.4-million, the company contributed R825 000 to his pension fund, he received a cash bonus of R7.8-million, “other” cash payments of up to R1-million and R264-million in conditional share proceeds, according to the company’s annual report. 

The second part of executive remuneration is short-term incentives, which are awards given to people in a time period of up to one year, and are often paid in cash. 

Short-term incentives, also called annual incentives, are typically tied to contributions that have the greatest effect on company performance and are used to inspire goal achievement. 

“Each company will have its own key performance indicators [KPIs] that are used to determine how much each employee receives. For executives, what will determine these is usually headline earnings [profit]. Over the years some companies have started incorporating some elements of non-financial KPIs such as environmental, social and governance [ESG] factors,” Kozah said. 

Short-term incentives can be deferred or paid as a compulsory bonus share scheme. 

“This is a mechanism which claims to ‘align the interests of management with those of shareholders’. For example, if the director performed well or achieved according to the KPIs for one financial year, the belief is, to keep that momentum, part of the rewards for the current financial year should be paid in future,” she said.

The third component of executive remuneration are long-term incentives, which are usually provided to encourage an executive to achieve results over a period of longer than a year, and are often paid by way of share awards. 

“Long-term investments are typically tied to contributions which have the greatest impact on company performance and are used to inspire goal achievement. There are certain targets that executives should meet for these incentives to vest [a director becomes entitled to the award or those shares]. Despite being referred to as “long-term”, the timeframes for these incentives [such as the one awarded to Froneman] are usually only three to five years,” Kozah said. 

Sibanye-Stillwater’s annual report shows that a sizable chunk of the chief executive’s pay came from a long-term share incentive scheme, which was a cash bonus of R7.8-million. 

The same applied for Capitec’s boss, Gerrie Fourie, who had a basic salary of R14.6-million and long-term and short-term share incentive schemes of R78-million. His total salary was R92.8-million in 2021. 

Share options are also a way for executives to get paid each time the company pays a dividend to shareholders. Kozah described a share option as the right to buy a certain number of shares in a company at a fixed price at some period of time in the future. 

“Employees can generally exercise their share options — that is, buy the shares — after a specified period, known as the vesting period. The rationale for this is that it gives employees an incentive to stay with the company, to purchase its shares and then — in theory — to work to increase the value of those shares. Share options can be a form of bonus, which is financial compensation that is above and beyond the normal payment expectations of an employee”. 

The Sibanye-Stillwater board’s incentive for Froneman in 2018 was share options which, after three years, vested to R264-million in conditional share proceeds. 

At the recent Capitec annual general meeting, 48% of shareholders voted against the implementation report of the bank’s remuneration policy. 

And at Sibanye-Stillwater, 27% of shareholders voted against the executive pay implementation report. This was after it was made known that Froneman received a hefty pay in 2021. 

“Over the past two years both the remuneration policy and the implementation report votes have passed. It is difficult to say with certainty whether the failed vote for the company’s implementation report was a result of the CEO’s pay package but it seems that this may have likely contributed to it, given the media coverage on the issue and the strike by the mine workers,” Kozah said. 

She said that according to the the JSE Listings Requirements listed companies must give their shareholders an opportunity to vote every year on both the company’s remuneration policy and its implementation report, which is how that framework has been applied in a given year, and for pay resolutions to be considered approved by shareholders, each should receive shareholder support of at least 75%.

“Crucially, however, these are both non-binding votes. So even if they fail, there is no obligation on the company to change the remuneration policy or implementation report. All it has to do is ‘engage with’ dissenting shareholders about the reasons for the ‘no’ vote”.

Kozah said South Africa has a problem of wage disparities between executives and employees because remuneration incentives in most listed companies are structured in such a way that chief executives will continuously get higher and higher increases. 

There is no incentive for remuneration committees or consultants to advocate for lower salaries, or smaller wage gaps, because this will negatively affect their own earnings. 

“At the moment, we are having this debate in SA with only half the relevant information, because listed companies are not required to disclose wage gaps. It is therefore impossible to ascertain whether they are paying all employees a living wage. This is a crucial first step in assessing how to solve the issue of ever-increasing executive pay,” Kozah said. 

Anathi Madubela is an Adamela Trust business reporter at the Mail & Guardian.

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