‘Executive Directors’ Remuneration and Practices’ report released shows that executive pay continues to come under intense scrutiny from all levels, and large listed companies exercise more restraint when considering the pay levels of their CEOs and executive committee members.
While there is little evidence to suggest that executive pay is out line with global norms, more and better disclosure is required on variable pay to enable the investor community to assess the toughness of the targets set on remuneration. Better disclosure will provide more uniformity across the board, particularly if companies lag behind their peers in certain industries. Proposals contained in the King IV Report introduce disclosure requirements for shareholders to understand an organisation’s remuneration policy.
The draft King IV Report will introduce the concept of fairness regarding executive remuneration and a new stakeholder-centric model that requires a shift to a model that incorporates KPIs linked to the concept of interconnected business. Business success is good for everyone and consequently any threat to business growth would be to the detriment of all stakeholders. The draft King IV report attempts to capture international ‘best practice’ defined as a course of action that should result in the best possible outcome for all stakeholders.
A new perspective on performance: measuring impact in the age of sustainability
Globally, companies are making a move to adopt the Sustainable Development Goals (SDGs). Although the requirements of the SDGs might not be common knowledge across the business world, awareness among South African companies is already high. Significant investment will be required to tackle a number of sustainability issues, and business will be a critical player.
Businesses have the ability to influence sustainable development by supporting the SDGs and it makes sense that in order to drive this successfully such goals should find their way into the executives’ performance scorecard. We take a look at these goals and where they will have the greatest impact to ensure the best possible outcome.
‘Say on Pay’
‘Say on pay’ is becoming more relevant than ever in the wake of increasing demands for South Africa to move towards a binding vote on remuneration. Recent experience in South Africa and internationally indicates that market failures relating to governance are partly due to an absence of active institutional investors, or investment behaviour driven by short-term results. Similar to the King Code, the Code for Responsible Investing in South Africa (CRISA) seeks to positively influence good corporate governance practices, in particular responsible investing by institutional investors. If South Africa is to make a move towards a binding vote, there needs to strong certainty that the shareholders who are given the right to vote are in a position to be able to critically analyse the remuneration policies and practices that they are expected to express a view on. We take a look at the trends why institutional investors have voted “no” or against these policies and practices both in South Africa and globally.
Executive remuneration versus investor return
The report focuses on the views of the investor community relating to executive remuneration. Worldwide, regulatory reforms have tried to address their concerns by empowering shareholders in various ways, from having binding votes at the annual general meeting and forced deferral of incentives to imposing earning caps. In the US, the Securities and Exchange Commission (SEC) released amendments to its rules for comment in April 2015.
In South Africa, we focused on the correlation between executive pay and company performance measured by share price growth and headline earnings per share in continuing operations (HEPS). The financial services industry shows some positive correlation between company performance and total guarantee pay (TGP) increases. In contrast, the basic resources sector shows the opposite with shareholders having lost significant value while executives continued to receive increases in their TGP despite the decline in global commodity prices.
We recommend that remuneration committees consider including such comparative data in their annual remuneration reports so as to facilitate a meaningful comparison between executive remuneration and shareholder return.
The ethics of pay
The shift to the other side is happening and is driven by what we can best describe as ‘Pay Morality’. Our objective was to always achieve ‘fair and equitable’ executive pay on the one side, and a ‘fair and equitable living wage’ on the other side. In South Africa the Gini coefficient of the employed is estimated to be 0.43 as at April 2016. This is much lower than the national statistic, which the World Bank reports to be 0.65.
The simple ratio of the total pay of the CEO to the average pay of the rest of the organisation is also gaining influence as a way of measuring the pay gap. If this ratio is calculated using the PwC Remchannel data, this ranges between 12.7 and 64.4 for most South African companies.
Currently, the implementation of a uniform national minimum wage is being debated in South Africa, with the likelihood of this being set at around R3,500 per month. There is no definitive data on what constitutes a living wage in South Africa, with levels of R7,000 to R10,000 per month being discussed in the course of the debate. Remuneration committees, and the social and ethics committees of leading companies should remain sensitive to the levels of pay of entry-level workers and aspire to pay these employees a level of remuneration that permits a dignified life when supported by other benefits that the company may provide.
Profile of an executive director
As at 29 April 2016 there were 1,179 executive directors appointed to active JSE-listed companies. There were 338 CEOs, 304 CFOs and 537 executive directors in this total.
Over a five-year period the number of executive directors on JSE boards has fluctuated above what is expected, considering the number of listed companies. The age profile reflects that there is a slight downward trend, with a median age of 52 and an average slightly higher at 53.
Gender inclusion in the boardroom is no longer a nice-to-have or a moral issue; it is a business necessity. While almost 45% of members of Parliament are female, women remain underrepresented in senior management in the private sector, with an average of only 18% of women on boards in listed companies.
Total guaranteed packages (TGP)
The report reviews the TGP over a three-year timescale and includes an overview of short-term incentives based on performance. There are a total of 56 companies included in the basic resources sector, with only a few still listed among the large-cap companies on the JSE. The impact of weak global demand for raw materials has negatively affected the basic resources sector and as a result there are modest increases in directors’ remuneration across this sector. The median TGP for CEOs of large-cap basic resource companies is R21.9m. and the median TGP for executive directors is R15.3m.
The median TGP for the CEOs of large-cap companies in the financial services sector has shown a marginal increase of 0.6% (R7m). The median TGP for the CFOs of large-cap companies in this sector showed an above-inflationary increase of 7% (R4.5m).
The median TGP for large-cap CEOs at industrial organisations also showed a modest increase of 6% (R14.7m).
Cash-based, formula-driven short-term incentives are offered to most executive directors. Director bonuses are intended to compensate executives for achieving the company’s current business strategy based on achievement of goals set by the board’s remuneration committee. Increases for CEOs in large-cap companies were more generous than last year (2015:16%; 2014: 3%).
Remuneration trends in FTSE 100 companies and other African countries
All listed companies in the UK, except for small businesses that are exempt, are required to disclose an aggregate remuneration for each director in their remuneration reports from 1 January 2016. AIM businesses and corporations that have only debt or non-equity share capital registered do not fall within the scope of the requirement to prepare a directors’ remuneration report. The directors’ remuneration report for a listed company is also different from the old version. The report is limited to what is considered total annual guaranteed pay, and excludes all variable pay.
Our study also includes 401 companies listed across 7 sub-Saharan Africa (SSA) stock exchanges: Botswana, Ghana, Kenya, Namibia, Nigeria, Tanzania and Uganda.
Remuneration sector analysis by country is not yet possible given the lack of information and the small number of listed entities in each sector.
CEOs are increasingly feeling the pressure to address wider stakeholder needs and we get a sense of how they are thinking about sustainability and other stakeholder matters and are starting to incorporate them into their businesses. Boards need to consider linking these strategic issues with executive remuneration.
Gerald Seegers is the Head of People and Organisation for PwC Africa.