Chief executives’ pay is no small issue
Excessive executive remuneration has become a global symbol of inequality. Public anger and shareholder discontent about the huge pay packages of boardroom bosses, especially when these packages appear to be disconnected from the performance of the companies they run, has given rise to a spate of new legislation on compensation disclosure.
In the United States, listed companies are required to disclose how much chief executives are paid in comparison with their median worker. United Kingdom legislation requiring mandatory executive pay ratio reports will come into effect in January 2019.
The Australian Labour Party recently announced that it would require all ASX-listed companies with more than 250 employees to report pay ratios publicly if the party is elected in the next elections.
In comparison, South Africa’s proposed legislative amendments currently on the table are disappointingly weak.
On September 21, the department of trade and industry published the Companies Amendment Bill, 2018, for public comment. Proposed amendments to section 30 of the Companies Act will require the directors of a public company to prepare a three-part directors’ remuneration report for each financial year.
The report must consist of a background statement, an overview of the main provisions of the company’s policy on remuneration, and an implementation report containing details of remuneration and benefits awarded to individual directors. The remuneration report must be approved by the board and presented to the shareholders at the annual general meeting.
Although the proposed amendment is a good start, the department has missed an opportunity to transform the way executive compensation is determined and justified in South Africa. This is puzzling in a country that is touted as the most unequal in the world, and in circumstances where there is already precedent in the King IV Report on Corporate Governance for a much more robust approach.
King IV emphasises that “the remuneration of executive management should be fair and responsible in the context of overall employee remuneration. It should be disclosed how this has been addressed. This acknowledges the need to address the gap between the remuneration of executives and those at the lower end of the pay scale.”
Disclosures providing information about directors’ remuneration would be much more useful if they were provided in the context of overall employee remuneration. This context would also enable shareholders to determine whether the remuneration of the lowest-paid workers is a “real living wage”, allowing them to maintain a satisfactory standard of living, and giving them a chance to lift their families out of poverty.
Just Share submitted comments on the Bill, which propose that, to align with King IV and with global best practice, the Companies Act should at the very least mandate more specific disclosures that provide context to the remuneration report. These disclosures should include:
- How the remuneration policy is deemed to be fair and responsible in the context of overall employee remuneration;
- An explanation of how the salary and employment conditions of employees other than directors were considered when setting the policy, including whether (and if so, how) the company consulted employees, and whether remuneration comparison measures were used;
- The difference in the company’s policy on the remuneration of directors and that of other employees;
- Whether the views of shareholders were taken into account in the formulation of the remuneration policy; and
- The remuneration of those employees in the bottom 10% of the salary range, and how many employees fall within this category.
If the government is serious about tackling inequality, it should be very interested in the extent to which the profits of listed companies are connected to unfair and irresponsible remuneration of their lowest paid workers. It could go a long way to establishing this by requiring the boards of listed companies to justify executive pay packages in the context of the vast inequality of South African society.
Tracey Davies is executive director of Just Share, a nonprofit shareholder activism and responsible investment organisation that promotes the use of investor power for a fairer South Africa