Stronger remuneration committees are the solution to rampant executive pay.
We’re seeing an imbalanced power dynamic between high-performing executives who associate significant rewards with the value they deliver and RemCos with structural expertise gaps that cannot assertively counter their demands.
Alternative remedies are likely to do more harm than good.
The danger of a binding vote
The majority of South African businesses try to abide by the King IVTM code of corporate governance to achieve balanced and appropriate outcomes for executives, shareholders and other stakeholders.
Yet, some CEOs, CFOs and executives continue to extract excessive remuneration from their companies. However, they have often built the enterprise from scratch or led it to significant growth, making them key to their company’s success. So they may control the balance of power with a Board and Remco not willing to cross them.
One suggested approach is to afford shareholders a binding vote that could deny gratuitous executive rewards, but this is risky.
These leaders are the drivers of the business’s growth and if their expectations are not met, they could move on and leave the Board to find a suitable successor, the impact of which will normally be a decline in the share price, and that similar scarce talent might be impossible to find. Consequently, shareholders may end up shooting themselves in the foot.
Rethinking the RemCo
A better solution is to equip the RemCo with the necessary expertise to rationalise, negotiate and even restructure proposed packages in a way that satisfies of all parties. This requires that the committee augments its competencies with a deeper knowledge of current remuneration trends, industry standards and competitive best practices.
To facilitate this solution, SARA is developing masterclass webinars and live sessions aimed at RemCo members, as well as other executive and non-executive directors, to enhance their understanding of executive remuneration.
In addition, King IV suggests that the committee invites an external advisor to guide it in its duties.
Executives will often hire remuneration consultants to help them determine the highest reward opportunities for their position. Their justification for greater compensation will be informed by data, industry benchmarks and practices and broader insights. RemCos without similar independent expertise will be left at a disadvantage.
In an ideal world, King IV might recommend a Master Reward Specialist as a standing member in all RemCos, allowing them to bring remuneration expertise, independent views and industry best practices to the negotiation.
A real solution
While most South African businesses have roped in runaway executive earnings, some executives continue to enjoy astronomical rewards.
Many proposed solutions – like more onerous regulations or a binding vote for shareholders – may have unintended consequences with would prove to be negative in the long run.
The only real solution is to empower remuneration committees to do the job they were created to do. Most of all, they must be able to challenge the CEOs and executives who, up to now in some companies, have retained the balance of power in their struggle for greater rewards.
Laurence Grubb is a Master Reward Specialist and Executive Committee Member at the South African Reward Association (SARA).