Increases in the guaranteed pay of chief executives at the largest 100 JSE-listed companies have exceeded inflation by a considerable margin over the past five years on a compound annual growth rate basis.
There also appears to be little correlation between CEO guaranteed pay and the size and complexity of the organisation, particularly among firms with a market cap of between R5 billion and R50 billion.
These are some of the key trends highlighted in Deloitte’s Inaugural Executive Compensation Report. Published against the background of growing criticism against excessive executive remuneration at some listed firms, the report provides an analysis of six years’ worth of executive remuneration and company performance data and an assessment of the remuneration reports of these companies.
“Advisory votes on Remuneration reports in the past may have seldom fallen below 50%, but the level of overall acceptance has certainly diminished, with many commentators and institutional shareholders vocal in their criticism, and votes in favour often sailing close to a 75% level,” the report notes.
A recent Moneyweb analysis of the Top 100 JSE-listed firms showed 14 occasions where more than 25% of shareholders who voted at the AGM were not in favour of the firm’s remuneration policy.
The report also comes in the wake of the introduction of the King IV Report on Corporate Governance. King IV is effective for financial years starting on or after April 1 2017 and will raise the bar for the implementation and disclosure of executive pay practices.
Leslie Yuill, head of Deloitte Consulting’s Actuarial, Reward and Advanced Analytics Practice, says King IV recommends that remuneration should be fair, responsible and transparent. In considering fairness, one arguably has to consider the increases that executives are receiving in relation to what the rest of the workforce are receiving.
Some commentators have contended that executive pay increases should be in line with those of the general workforce (market-related), where guaranteed pay hikes are broadly expected to be in line with inflation.
According to the report, annual cash incentives paid to the CEO and CFO over the period were “considerable in relation to guaranteed pay, but with little indication of the performance linkages”.
In the case of the CEO, Deloitte only identified 15% of instances where an incentive was not paid over the last six years.
Nick Icely, associate consultant for Executive Compensation at Deloitte, says it seems that performance variable pay is almost seen as a given – executives generally receive a bonus as long as they haven’t severely underperformed during the year, but only receive an exceptional bonus if they have fully achieved their targets.
Shareholder and company value
According to the report, an index of top executive pay over the last five years has generally tracked an index of shareholder value that has been sustained in rand terms. The same index has also generally tracked an index of company turnover performance, but outstripped bottom line performance.
Against the background of South Africa’s skewed income distribution and inequality, certain commentators have called for a workforce pay metric to be taken into account when benchmarking executive pay.
While King IV will definitely put this issue in the spotlight, reducing CEO pay is probably not the best way to address the wage gap between top and bottom earners, Yuill says. Stakeholders have to acknowledge that the general standard of living of the workforce won’t improve by reducing CEO pay. The remuneration and social and ethics committees have to take a view on remuneration that is fair, reasonable, defensible and justifiable when evaluating median worker pay while also taking into account affordability and acceptable productivity levels.
From a societal point of view, it may however be a good idea to reduce the increase in executive pay. It doesn’t appear that corporate South Africa has responded to this issue in any meaningful way over the past six years, Icely adds.
Although the level of disclosure has improved over the past six years, it still leaves a lot to be desired if there is going to be a meaningful dialogue, Icely says.
Yuill says an analysis of annual reports over the last two years shows that compensation numbers were often reported without meaningful disclosure as to the factors that were taken into account to derive at the remuneration.
“I think that does become a concern because the context is not always there.”
In the absence of a justification or a narrative in the remuneration report that explains how the compensation was determined, what the circumstances were and what performance indicators the CEO was measured on, the immediate conclusion is that the number is incorrect, obscene or too high, Yuill says.
There needs to be a lot more work around the quality of disclosure in order for stakeholders to make a far more informed decision around whether the pay was justified or not, he adds.
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