SA’s top companies are starting to embrace the concept of fair and responsible remuneration, and some have even adopted and disclosed a living wage that goes beyond the national minimum wage.
The adoption of malus and claw back is also growing rapidly, with companies expected to demonstrate the contingency plans they have in place to recover incentives paid to executives who have overseen massive corporate failures.
“Executive pay continues to be in the spotlight, with everyone from institutional shareholders, the government, the media and other interested stakeholders, having an opinion on it. One cannot underestimate the value that an effective CEO can add to a company – it is a high-profile position, particularly in a listed environment. Although companies are starting to accept the notion of fair pay more should be done to increase the awareness around fair and responsible remuneration on a national scale.”
– Gerald Seegers, Head of People and Organisation for PwC Africa
Our 11th edition of the Executive directors: Practices and remuneration trends report released recently focuses on the role of the CEO, and what factors companies should take into account when calibrating their philosophy towards CEO pay. The report also explores the role of the CEO in setting the remuneration strategy of the organisation.
Setting executive pay
Should all CEOs be painted with the same brush when setting executive pay? In general, a similar total reward package structure is provided to most CEOs.
This usually includes a guaranteed portion, a short-term bonus and a long-term incentive – this is usually considered the ‘best practice reward model’. The question arises as to whether different reward models should exist for different types of CEOs operating in different environments?
The report considers several different pay models. There is no one size fits all approach – without adding unnecessary complexity to the CEO pay models, companies should try to find a balance between a simple and effective yet fit for purpose solution.
In this report, we also explore the simplification of highly complex executive pay plans in order to draw a more explicit link to shareholder value creation.
Sustainability issues have become entrenched on the corporate agenda and there is an increased focus on aligning companies’ environmental, social and governance (ESG) activities with the United Nations Sustainable Development Goals (SDGs).
Although South African companies are not yet under any obligation to consider ESG factors, there is pressure from both stakeholders as well as international practice to prioritise ESG factors.
The report suggests that companies should actively engage with their shareholders on ESG issues, listen to shareholder concerns and actively act on the feedback received.
Investors have their say on executive pay
It is positive to note that South African remuneration committee chairs are coming to terms with investor expectations around shareholder engagement and regular training.
However, there is still some way to go before remuneration committees are fully equipped and able to execute their duties in line with King IV™ and best practice. At our most recent institutional investor round table on remuneration, we spoke to representatives from some of the largest institutional investors and asset management firms to understand their views on remuneration.
Overall, some investors were more positive about the state of remuneration practices in South Africa. However, the quality of some boards of listed companies, and the general lack of knowledge among remuneration committees, remains a pressing concern.
The economics and ethics of pay
The concept of fair and responsible pay has been around for a few years, but it is still unknown as to how many companies have adopted it.
As a preliminary measure, we conducted an analysis of the top 40 JSE-listed companies based on the integrated reports available until 30 April 2019 to assess the extent to which they had mentioned fair and responsible remuneration in their remuneration reports. It is encouraging that almost two-thirds of companies mention fair and responsible remuneration in their reports.
The South African Gini coefficient of the employed for this year is at 0.436, marking an increase of 0.011 compared to the Gini for 2018. The pay ratio of the largest South African companies now ranges from 12.77 to 66.91 (2018: 12.7 to 64.7).
The plight of the ‘working poor’ is more pressing than ever in the face of increasing unemployment and a depressed economy. What is encouraging is that some companies on the top 40 have begun to embrace the concept of a living wage and the provision of essential benefits as part of the employee value proposition.
However, more needs to be done to fully realise the ideals of fair and responsible remuneration in South Africa.
Worldwide, gender equality remains a focus area for many companies as the awareness surrounding the gender pay gap continues to gain momentum.
The World Economic Forum (WEF) Global Gender Gap Report 2018 ranked South Africa as 19th overall (no change since 2017) in terms of gender gap equality with a slight decline in gender wage equality, where South Africa was ranked 117th (from 114th in 2017).
The report shows that only 3.3% of CEOs on the JSE during the period under review were women.
The gender pay gap is the gap between what men and women are paid at total guaranteed package (TGP) level. It refers to the median annual pay of all women who work full time and year-round, compared to the pay of a similar cohort of men.
According to the report there is no sector in which overall, female executive directors are paid more than men. The largest pay gaps are in Healthcare (28.1%), followed by Consumer Discretionary (25.1%), Technology (22.9%) and Financials (21.8%).
To bring about real change, companies should not address gender parity and diversity concerns merely to appease individuals or organisations, but should rather treat these initiatives as being essential components in their long-term success.
Profile of an executive director
As at 30 April 2019, there were 335 CEOs (2018: 342), 310 CFOs (2018: 325) and 435 executive directors (2018: 477) in office.
Since 2018, there has been no meaningful change in the average age of executive directors at 56. It is notable that only 29,5% of executive directors are black African compared to 40.0% that are white.
The average board tenure for executive directors on the JSE for reporting periods 1994 to 2018 is 4.5 years. The longest tenure is for executive directors (4.7 years), followed by CFOs (4.5 years), and CEOs (4.3 years).
Remuneration trends in South Africa: JSE listed companies
The report reviews the TGP for all executives paid during the reporting period and includes an overview of short-term incentives paid to executives.
The report also reviews the executive pay of the top 10 listed companies on the JSE, which account for 62% of the total market capital invested. As the sample is not large enough to calculate quartiles, only the average has been calculated.
The median pay for CEOs in 2018 across all sectors was R5.4 million (2017: R5.2 million). For CFOs the average was R3.8 million (2017: R3.6 million) and for executive directors R3.3 million (2017: R3.1 million).
The executive pay for each sector, categorised in line with the Industry Classification Benchmark (ICB) is also analysed. There is a total of 49 active companies included in the basic materials sector. The median TGP for CEOs of large-cap basic materials companies is R16.8 million and the median TGP for CFOs is R6.9 million.
At cut-off date, the financials sector accounted for 15.71% of total JSE market capitalisation. The median TGP for the CEOs of large-cap companies in the financial services sector showed a moderate increase of 5.4% (R9.6 million), while the median TGP for CFOs increased by 5.5% to R5,15 million. The median TGP for executive directors showed an increase of 5.2% (R5.7 million).
The average TGP for large-cap CEOs at industrial organisations showed an above inflationary increase of 7.8% (R12.7 million), while the average TGP for CFOs increased by 5.2% (R5.9 million). The median TGP for executive directors showed an increase of 6.4% (R3.8 million).
A high level TGP trend analysis during the reporting period is reflected for CEOs (R3.4 million), CFOs (R2.5 million) and EDs (R2.8 million) of small-cap companies in the technology sector. At cut-off date the telecommunications sector accounted for 3% of total JSE market capitalisation. The average TGP for the CEOs of large-cap companies in the telecommunications sector increased by 7.6%.
Short-term incentives (STI), also often referred to as annual incentives, are intended to compensate executives for achieving the company’s near-term business goals. These vary depending on the benchmarks set for executives. Significant increases were not the norm for CEOs (- 4.3%) and CFOs (- 20.6%) of large-cap companies across all sectors, although EDs saw a significant increase (27.6%).
Remuneration trends in FTSE 100 companies and other African countries
At the cut-off date there were 2 125 (2018: 2 028) active companies listed on the London Stock Exchange (LSE) with a market capitalisation of GBP 3 869 trillion (2018: 3 949 trillion).
For the FTSE 100 analysis set out in the PwC report, base pay and stated benefits across all sectors and positions reveal that median remuneration sat at US$1.262 million compared to US$1.182 million in the previous reporting period.
Turning to the analysis of the seven other sub-Saharan African countries, the median total guaranteed package paid to executive directors across these jurisdictions rose to US$168,000 (2018: US$163,000).
The report includes 412 companies listed across seven sub-Saharan Africa (SSA) stock exchanges: Botswana, Ghana, Kenya, Namibia, Nigeria, Tanzania, and Uganda.
More needs to be done
It is clear that a CEO’s remuneration package cannot be determined by the board in isolation.
There are a number of factors that must be considered, including the nature of the incentive payments made to him or her, the performance conditions applicable to their short and long-term incentives, how an unjustifiable pay package which is divorced from the concept of pay for performance can compromise the company’s approach to fair and responsible remuneration, and whether they are doing enough to create an inclusive culture in their businesses that effectively embraces women and people from diverse backgrounds.