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Keeping tabs on executive pay

The debate on excessive executive pay is as hot as ever – and what a difference 18 months makes to the discourse.

When the economic development department released its new growth path at the end of 2010, it proposed, among other things, caps on salaries and bonuses for senior managers and executives earning more than R550 000 a year.

Bobby Godsell, the chairperson of Business Leadership South Africa, called it an “idea-rich document” but said companies would not give up the right to decide their own salary levels or accept a cap on what people might earn. “If that is what the government is intending, then there is very little chance of that happening,” he said.

Last week, however, Godsell sat side by side with Minister of Economic Development Ebrahim Patel and suggested that an independent commission be established to look into excessive executive pay.

Godsell also suggested that a “low pay” commission should be given the task of establishing the level of remuneration needed for the minimal level of existence.

101 times higher
South African chief executives are sometimes paid more than 40 times the average salary of employees. The 2010 Statistics South Africa household survey found that the top 10% of earners in South Africa took home salaries 101 times higher than the bottom 10% of earners.

Godsell said Business Leadership South Africa was developing its own code of conduct for remuneration and labour practices.

The organisation said in response to the national development plan produced by the National Planning Commission that “improvements to the labour market will need to involve give and take at all levels”.

“Wage moderation should be pursued at all levels, including some sacrifices by management. Moreover, entry-level wage flexibility should not be won as an excuse to displace existing workers,” it said.

Simply looking at curbing executive pay was the wrong approach, said Adcorp labour economist Loane Sharp. “It’s the politician’s approach. What’s needed is to give more power to boards to connect pay to performance.”

Hidden or unclear motives
Adcorp’s labour market navigator, released earlier this year, has found that 99% of the variation in executive pay is explained by factors other than profitability, suggesting “chief executive remuneration is overwhelmingly based on motives that are hidden or unclear”.

Adcorp has modelled how closely executive remuneration is connected to each company’s performance. Chief executive pay (the sum of total basic compensation and short-term performance bonuses) is weighed up against the executive’s tenure, added to the total number of employees and return on shareholders’ funds.

The research does not include executive share options because they are not easily available, hiding in company financials – “so we were really looking at the minimum salaries … it could be higher”, said Sharp.

The research has established that 60% of the chief executives in South Africa are, in fact, underpaid. Although 31% of the total executives surveyed are overpaid by more than R1-million a year, the remaining 9% are overpaid by more than R5-million a year.
“The 10 most overpaid chief executives account for almost half of the total amount of excess chief executive remuneration for the 2011 financial year,” Adcorp said.

Trade union Solidarity said high executive pay complicated wage negotiations. It has welcomed Business Leadership South Africa’s commitment to developing a code of conduct and Godsell’s call for an independent commission on executive pay.

Breach of trust
Chris du Plessis, Solidarity’s spokesperson, said wage negotiations were weighed down by exorbitant salaries and bonuses on executive level in several industries last year. “During the strikes in the petroleum and coal sectors last year, we saw that the excessive increases awarded to executive directors and heads of the relevant companies caused a serious breach of trust between employees and management.”

This led to complicated negotiations that, in turn, might give rise to strikes, he said.

“Transparency regarding executive pay and bonuses could prevent complications further down the line.”

Du Plessis said remuneration had to be linked to performance or the contribution that had been made and it had to retain scarce skills.

Strides against excessive executive remuneration are not unique to South Africa.

Fair pay report
A commission has studied excessive pay in the United Kingdom and recommended that company executives are paid basic salaries, remuneration reports are standardised,  listed companies produce fair pay reports, employees are represented on remuneration committees and an independent body is permanently established to monitor high pay.

The head of insurer Aviva resigned this month shortly after the chief executives of AstraZeneca and Trinity Mirror quit when investors challenged their pay.

In Australia executive remuneration reforms came into effect last year with provisions for how ­companies deal with remuneration consultants. A “two strikes” rule was implemented, according to which shareholders can vote in a new board when 25% or more of votes at two consecutive annual general meetings oppose a remuneration report.

At Royal Dutch Shell’s annual general meeting this week, a growing number of shareholders opposed the company’s executive pay package. Nine percent voted against a proposed remuneration package, up from 2% the previous year.

Reuters reported that executive pay had been a hot topic during annual general meetings this year and companies in the United States and Europe experienced a spike in votes against remuneration reports.

Economic debate
But talk about remuneration has yet to turn into action in South Africa.

Raymond Parsons, deputy chief executive at Business Unity South Africa, told the Mail & Guardian that the issue formed part of the broader economic debate and the organisation was still canvassing its members. Busa was already dealing with executive pay through the new growth path, although it had not yet been finalised, he added.

“There are a number of mechanisms that can be considered in order to increase transparency around executive pay and these are being explored by Busa,” Parsons said.

“The issue of executive pay is relevant to good governance requirements in terms of the new Companies Act and in particular the role that must be played by remuneration committees and shareholders.”

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