Internationally, there is a growing trend to reduce executive pay in response to the current COVID-19 crisis.
South Africa is following the trend, with several private sector companies voluntarily announcing reductions and donations in executive pay, among them Woolworths, EOH, FirstRand, Vodacom and Sibanye.
The South African Reserve Bank’s Prudential Authority, the banking sector regulator, has asked banks to avoid paying ordinary dividends or executive bonuses this year and of course, our President announced in his more recent addresses to the Nation that cabinet members will take a 1/3 pay cut and contribute this to the Solidarity Fund.
Getting executives to lead by voluntary example by accepting pay reduction at this time is the appropriate thing to do from several viewpoints.
As a gesture of solidarity at this time, executive pay sacrifice can be a powerful morale booster and could provide a way to repair some of the damage caused by the perception that executives are over-rewarded.
Executive pay cuts, along with dividend freezes, also make sound business sense because, in uncharted waters like these, conserving cash is going to be key to survival – and thus to keeping as many jobs as possible.
Dr. Mark Bussin, SARA executive committee member and Master Reward Specialist, says: “If there is one thing that the Corona Virus crisis has done, it has united us against a common enemy. I have seen so much goodwill between communities. I almost want to be thankful that we got this wake-up call. Perhaps we can explore this comradery further by each organisation seeing all employees in the same boat and showing more sympathy and empathy towards each other. This should include a deliberate effort to narrow the wage gap. Let’s not waste a perfect crisis”.
Executives are likely to be able to better weather a significant reduction in their income than low earners who subsist from pay-check to pay-check.
I expects that most variable pay, which makes up a significant portion of the remuneration of top executives, would be curtailed—although most performance targets are in any event unlikely to be met if the economic fallout is as bad as predicted.
Executives could be incentivised to lead their business to survive the crisis and thrive in the future by means of restricted share awards rather than cash incentives, even though these would have the effect of diluting the assets of existing shareholders. Any such awards should be granted prudently to mitigate the perception that executives are taking undue advantage of currently depressed share prices.
Looking beyond the short to medium term, I do not foresee that these emergency executive pay cuts will necessarily translate into a permanent reduction in the wage gap between a company’s executives and its lowest paid employees.
I believe that ultimately pay is governed by supply and demand, as well as the imbalance in negotiating skills between executives, company remuneration committees and shareholders.
These factors will not disappear, and shareholder activists will continue to have limited room for manoeuvre given that shareholder votes on remuneration are typically non-binding.
If enough companies close down, there might be a glut of top executives looking for jobs, and this could bring down executive salaries.
Issues of poverty and unemployment may be more pressing issues and drivers of fundamental inequality and suffering than the corporate wage gap.
At the end of the day, human dignity and well-being is highly dependent on the ability to earn a living wage. We should be focusing our efforts on ensuring the maximum number of people have a job and are earning a living wage.
Nicol Mullins, SARA executive committee member and Master Reward Specialist says: “There is an incredible opportunity for organisations to unite and build trust. The call to reduce compensation and contribute to assist others in need is not only answerable by executives, but by all to the level of where it makes sense. Nothing stops the rest of a workforce to contribute voluntarily. What we need right now is not the money of a few, but the collective action of many – meaning financial, and through other means.”
“The recent proposal by 65 economists, academics and business analysts for a universal basic income grant of R1 000 for four months also has merit to protect the vulnerable whilst we reboot the economy”.
The work that organisations have done is admirable, specifically around the sacrifices executives are making, but this can be short lived once the crisis is abated if the focus falls away. The result could mean that the after-effects of COVID-19 is that the wage gap will not shrink because some segments of the population will be affected disproportionately. “Many lower skilled jobs may start to fall away as time progresses and ways of work evolve”, says Muhammed Goolab, SARA executive committee member.
Martin Hopkins is the President of the South African Reward Association (SARA) and is a Master Reward Specialist.