Rules on executive bonuses and incentives need to be tightened to boost corporate governance, professional services firm PricewaterhouseCoopers’ (PwC’s) ‘Executive Directors: Practices and Remuneration Trends’ report has found.
PwC Africa people head Gerald Seegers on Thursday stated during a briefing that remuneration reporting trends and the dynamics around ‘say on pay’ have changed since the introduction of the amended JSE listing requirements in May last year, which calls for fair and responsible remuneration reporting that must be implemented across an organisation – with a special focus on junior employees.
The PwC report looked at the impact of corporate failures on executive remuneration and considered whether the time has come for companies to put risk-adjustment mechanisms such as malus and clawback to the test.
This is against the macroeconomic backdrop of increasing corporate failures in South Africa and persistent inequality.
Malus provisions are used as an ex-ante risk adjustment over executive pay. These
provisions are usually imposed over executives’ short-term and long-term incentives. The trigger events for malus are often the same as or very similar to those prescribed for clawback.
Clawback creates the obligation for executives to repay amounts to the company that should rightfully not have been paid to them.
The question PwC raised was 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,” said Seegers.
Moreover, the report considers the future of executive benchmarking, which has been a traditional tool used to attract and retain employees who are critical to the performance of the organisation.
PwC stated that 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.
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 PwC 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 May 1, the first national minimum wage was introduced in South Africa at R3 500 a month. 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 a living wage is around R10 000 to R12 000 a month.
The PwC report also discussed the progress made nationally and internationally regarding the gender gap in remuneration.
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.
However, it also estimates that the global workplace gender gap will not be closed for the next 217 years.
In South Africa, the proportion of women to men in executive roles is still low. “We examined the gender total guaranteed packages (TGP) median pay gap in 2017 among 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,” said Seegers.
The report reviewed the TGP for all executives paid; the median for CEO remuneration went up by 7.6% to R5.2-million, in 2017, and the report also included an overview of short-term incentives paid to executives.
Further, the average pay for the CEOs of the ten largest JSE-listed companies was R24.9-million in 2017. For CFOs the average is R15.1-million and for executive directors R8.7-million.
The executive pay for each sector was also analysed. There are 46 companies included in the JSE’s 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 R24-million and the median TGP for executive directors is R18.7-million.
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% (to R8.6-million). The median TGP for the executive directors showed an increase of 15.5% (to R5-million).
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% (R16.1-million). The median TGP for executive directors showed an increase of 2.8% (R5.8-million).
The median TGP for the CEOs of large-cap service companies showed a significant increase of 15.6% (R9.3-million). Similarly, the median TGP for executive directors increased by 12.5% (R4-million).
“In conclusion, 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,” Seegers said.