Tyrone Jansen | Associate Director | Human Capital | Deloitte Africa | mail me |
How much is enough when it comes to the pay of executives in South Africa? Is the remuneration system broken? And if so, what can be done to fix it? These are some of the burning questions under the spotlight in a new study by our firm.
The 2019 Executive Compensation Report, now in its third year, is a detailed multiyear analysis of top executive pay in relation to company performance and shareholder alignment among JSE companies.
It covers the listed top 100 companies as well as the Second Tier 150 (ST 150) companies.
Intense public and media scrutiny
The release of the findings come at a time when executive pay continues to attract intense public and media scrutiny, both locally and abroad, with much of the focus on the growing inequality between those at the top of the organisation and the general workforce.
These insights are particularly timely as Remuneration Committees and Shareholder Representatives discuss remuneration and implementation policies in the early part of the year.
In a break from the past reports, we provide input into and commentary on several ‘hot topic’ issues currently under debate, both in the media and in corporate circles.
On two of these related issues, ‘what is fair and reasonable?’, and ‘how much is enough?’ most stakeholders in the debate, albeit some more reluctantly than others, will concede that executives should be paid well for their services to shareholders, to business and the economy, and to society as a whole.
However, the visibility of the gap in executive pay to worker pay in South Africa has long been a major societal concern, so the pressure on executive pay will continue, and along with it the requirement to justify the quantum of pay in relation to performance.
What is fair and reasonable in executive pay
The King Committee published the King IV Report on Corporate Governance for South Africa in November 2016 and with its full implementation now in place, a Single Figure – comprising an executive’s salary, benefits, Short Term Incentives (STIs), Long Term Incentives (LTIs) and performance awards – is required to be disclosed.
In the report, we recommend that the Single Figure should not merely be a metric by which annual pay comparisons are to be made.
It should be utilised in a proactive as well as a reactive sense and become a standard to inform executive pay design – allowing internal and external comparisons on pay, but most importantly inform the shareholder and societal debates around what is fair and reasonable in executive pay.
According to the report, using this as a standard would allow companies to apply some level of flexibility in pay design, whilst staying within an acceptable single figure parameter: this in contrast to the current situation in which some companies are supposedly conforming to or being dictated to conform to the many and varied ‘benchmarks’, which are currently much-maligned, misaligned and often misused.
The Single Figure Standard might become a way by which all stakeholders could assess the full quantum of executive pay overtime, from whatever perspective they view it, whether internally, externally, or by sector and/or societally and also allow companies to tailor a pay mix that is best fit for its specific circumstances rather than just conform to an inflated benchmark across individual pay components.
Remuneration Committees will have to continue to focus both on the target-setting process to ensure targets are appropriately stretching and on the disclosure of these targets in relation to the pay-outs.
Calling for more regulation
In support of this, we have developed a detailed guide for Remuneration Committees and Chairs who are the important custodians of executive pay and who are charged with developing an executive remuneration strategy, which will support the effective execution of the business strategy, achievement of the company’s goals and ultimately enhanced shareholder value.
On the question of whether the executive pay system in South Africa is broken, many commentators have expressed the opinion that it is too complicated and needs to be simplified, with some calling for more regulation.
Is the system broken? The answer is no, but it does need continual review, enhancements and tailoring as businesses change.
Should we get rid of it? The answer is an emphatic no. All parties should persevere, striving for improvement, and eradicating the irritations that justifiably lead to criticism.