South Africa should look East for guidance on executive salary remuneration, says Congress of South African Trade Unions (Cosatu) economist Neva Makgetla, responding to the continuing exodus of top business talent, some of whom are quitting to manage their personal fortunes on a full-time basis.
Two high-profile resignations bring to more than 20 the number of top executives who have quit their high-powered positions, having built up tidy fortunes from generous salaries and share options.
They are cashing in, observers say, from options given to them five or so years ago during the last bull market. At the same time executive pay has become the focus of growing concerns over workplace disparity and has increasingly become a factor in union demands for inflation-beating pay increases.
It would appear that for companies other than the very large (JSE top 20) ones, median guaranteed pay levels of senior executives have almost trebled from 1993 to 2003, and have grown about another 20% over the past two years to 2005, says Deloitte’s Nick Icely.
“Also of interest is that, on top of guaranteed pay, annual bonuses actually paid, expressed as a percentage of guaranteed pay, have grown from about 10% to 15% in the early years to currently 30% to 40%. Interpreted another way, the contribution of annual cash bonuses to total annual remuneration levels has moved from 10% to 15% to currently 25%,” he says.
“We are setting ourselves up to fail,” says Makgetla, who has accepted a position in the Presidency. Western countries have gross domestic products 20 to 30 times higher than South Africa’s, and local companies find it difficult to compete on the pay scale. Local pay disparity, however, is among the highest in the world.
In a globalised labour market, South African companies feel they need to compete with counterparts in the United States and Britain. Makgetla says a change of focus is needed.
She says we should concentrate on emulating Asian countries, where the pay gap between workers and CEOs is much lower. Pay disparities contribute to underdevelopment because high-income individuals prefer imported products, limiting local demand. “It downgrades living and employment conditions,” she said.
In South Africa, the poorest 10% of the population receive only 2% of the national income, so it is difficult for them to participate in the economy.Massive inequality can also give rise to social conflict and increased strike action, as the poor increasingly realise they are being left out of wealth creation.
What’s needed, she says, is a shift in thinking. People shouldn’t think “I can get more overseas”, but decide whether they’re serious about South Africa.
In Asian countries, CEOs don’t get hugely disparate salaries or stock options. Rather, there’s a social ethos that recognises the importance of the community versus individual gain. In Japan, CEOs earn 10 times more than their workers, compared with 51 times in South Africa.
In Taiwan, CEOs earn 15 times more and in South Korea, 11 times more. In China, the figure is 21 times and in Thailand 23 times more, according to a 2000 report by consulting firm Towers Perrin.
“There is very strong developmental propaganda by the state [in those countries],” she said.
“You see something beyond making money for itself. People stay in the Third World because they are dedicated to their countries,” said Makgetla.
“Current remuneration trends are showing that executive packages are resulting in significant wealth creation. Trends indicate that most companies are placing financial rewards as the primary driver of their talent-management strategy. As a result, companies are providing ever more lucrative packages,” recruitment consultancy Mabili told the Mail & Guardian.
Outgoing Pick ‘n Pay CE Sean Summers earned about R31-million for his years in office, not including share options, while deputy Sasol chief Trevor Munday, another recent resignation, took home R11,4-million for the past three years, not including share options.