Executive directors are facing a number of challenges and their companies are increasingly being held to account for their contribution to social upliftment in the face of pervasive inequality.
Recent corporate failures have highlighted the importance of good corporate governance and ensuring that remuneration packages are appropriately structured so as to not drive excessive risk-taking.
Remuneration reporting trends and the dynamics around ‘say on pay’ have changed since the introduction of the amended JSE Listings Requirements. Fair and responsible remuneration is a concept that must be implemented across an organisation and pay conditions for junior employees must be given special focus.
PwC’s 10th edition of the Executive directors – Practices and remuneration trends report 2018 looks at the impact of corporate failures on executive remuneration, and considers whether the time has come for companies to put risk-adjustment mechanisms such as malus and clawback to the test.
Candid remuneration reporting
Overall, great strides have been made on remuneration reporting as we see more organisations striving to meet sound governance standards. The new long-term incentive (LTI) disclosure format is also regarded as the ideal opportunity to create a more transparent way of disclosing the full view of remuneration due in any current financial year.
Building and maintaining an organisation’s status as a responsible corporate citizen requires it to obtain and hold the trust of all its stakeholders. Meaningful improvements in reporting and disclosure on executive remuneration will go a long way towards building trust with key stakeholders.
The future of executive benchmarking
The report considers the future of executive benchmarking.
Traditionally, benchmarking has been one of the primary tools used to attract and retain employees who are critical to the performance of the organisation. There has been increased debate among institutional investors and other interested parties recently regarding the appropriate methodology for determining a peer group to benchmark against.
A new approach to benchmarking is suggested that first involves the determination of a pay range for executives, followed by determining a particular executive’s movement through the range, which would be linked to performance through the executive’s tenure.
Corporate failures and their impact on executive remuneration
The Companies Act 71 of 2008 aims to increase both the transparency and accountability of those individuals tasked with leading and managing companies.
Although the Act provides stakeholders with remedies through which to address instances where directors have failed in their duties and responsibilities to the company, relying on these provisions may be costly and taxing.
The question that must be answered is what effect a breach of fiduciary duties or misconduct will have on the remuneration of executives and whether companies should claw back incentives paid to or vested in culpable executives in the event of a corporate failure.
In light of the current climate and recent corporate failures, companies need to look at whether they have the appropriate measures in place to hold executives to account if the need arises, and if necessary recover their variable pay.
The ethics of pay
Fair and ethical remuneration, and the most appropriate measures government, business and labour and other stakeholders must take in order to better the lives of more junior workers to establish a ‘living wage’ remains under debate.
The Gini coefficient of the employed has declined slightly to 0.429 in 2018 from 0.431 in 2017 and decreased significantly from 0.44 in 2014 when we first measured this indicator.
The pay ratio for a company, which is the ratio between the total remuneration of the CEO of a company and the average of the total remuneration of all other employees of the company has increased from 61.8 in 2017 to 64.7 in 2018.
On 1 May 2018, the first national minimum wage was introduced in South Africa. The conflation of the concepts of a ‘minimum wage’ and a ‘living wage’ has led to disputes over the course of this year with organised labour. There is no definitive study available to establish a South African living wage level, but the general view among reward professionals and large corporates is that this is around R10,000 to R12,000 a month. It is notable that several large corporates have made efforts to raise the pay for their most junior workers to around this level, and that some now actually disclose this in their remuneration reports.
The report also discusses the progress made nationally and internationally regarding the gender gap.
The World Economic Forum’s 2017 Global Gender Gap Report indicates that 68% of the global gender gap has been closed, a decrease from the 2015 and 2016 results. It also estimates that the global workplace gender gap will now not be closed for the next 217 years.
In South Africa, the proportion of women to men in executive roles is still low. We examine the gender TGP median pay gap in 2017 amongst JSE-listed companies. We also explore how local and global institutional investors have taken steps to hold companies to account on whether they have promoted gender diversity and representation on their boards.
Profile of an executive director
As at 30 April 2018 there were 1,144 (2017: 1,174) executive directors appointed to active JSE-listed companies. There were 342 CEOs (2017: 355), 325 CFOs (2017: 310) and 477 executive directors (2017: 509) in office at that date. The number of executive directors has levelled out over the past few years. There is no meaningful change in the average age of executive directors at 55. The median age is 54. Board tenure for executive directors serving on the JSE for reporting periods 1994 to 2018 is 4.6 years. The longest tenure is for executive directors, followed by CEOs and the CFOs, trailing somewhat at 4.1 years.
Remuneration trends in South Africa: JSE listed companies
The report reviews the total guaranteed package (TGP) for all executives paid during the reporting period (median for CEOs up by 7.6% to R5.2m) and includes an overview of short-term incentives paid to executives.
The report reviews the executive pay of the JSE top-10 companies, which account for 60% of the JSE’s market cap. Since the sample is insufficient to calculate quartiles, only the average has been used. The average pay for CEOs is R24.9m. For CFOs the average is R15.1m and for executive directors R8.7m.
The executive pay for each sector is also analysed. There are a total of 46 companies included in the basic resources sector, with only seven listed among the large-cap companies on the JSE. Oil & gas producers have now been included in this sector. The median TGP for CEOs of large-cap basic resource companies is R24m and the media TGP for executive directors is R18.7m.
The financial services sector is under sharper scrutiny than ever and the responsibility on directors’ shoulders have increased. The median TGP for the CEOs of large-cap companies in the financial services sector showed an above-inflationary increase of 14.9% (R8.6m). The median TGP for the executive directors showed an increase of 15.5% (R5m).
Many companies in the industrial sector are showing little growth because of slow economic growth. The median TGP for large-cap CEOs at industrial organisations showed a moderate increase of 5.8% (R16.1m). The median TGP for executive directors showed an increase of 2.8% (R5.8m).
The median TGP for the CEOs of large-cap service companies showed a significant increase of 15.6% (R9.3m). Similarly, the median TGP for executive directors increased by 12.5% (R4m).
Remuneration trends in FTSE 100 companies and other African countries
As at 30 April 2018 there were two, 028 (2017: 2 036) active companies listed on the LSE. The median TGP of all executives serving on the FTSE 100 converted to US dollars was US 814,000.
The report includes 407 (2016: 412) companies listed across seven sub-Saharan Africa (SSA) stock exchanges: Botswana, Ghana, Kenya, Namibia, Nigeria, Tanzania, and Uganda. The median remuneration paid to CEOs across these seven African countries is WE 245m, and the total TGP paid to executive directors is US 163,000.
Benchmarking methodologies on executive remuneration need to be developed further.
The challenges that remuneration specialists and remuneration committee members face is the design of strategies and policies that are aligned with sound corporate governance principles, while motivating executives and safeguarding shareholder interests.
Only by challenging the status quo regarding how remuneration policies have historically been approached will we be able to do our part to guard against corporate failures and play our role in creating future-proof organisations that are focused on sustainable value creation.