Company Announcement - Unisa Graduate School of Business Leadership. Politicians, the media and unions have criticised the current Chief Executive Officer  pay levels at firms listed on the Johannesburg Stock Exchange, particularly when compared with average employee salaries. The Gini coefficient index consistently ranks South Africa among countries with the highest levels of inequality between high income groups and groups earning a basic wage, supporting public comment by union representatives that either the country’s lower level employees are underpaid, or senior employees are overpaid. However, according to Professor Jan Kruger, associate professor at the Unisa Graduate School of Business Leadership, these emotionally-charged overgeneralisations are often not based on facts.

Prof Kruger and top SBL Master of Business Leadership graduate Barend Deysel have released a study that scrutinises CEO compensation in the context of growth in the performance of five companies over a seven-year period in the banking industry. {The relationship between South African CEO compensation and company performance in the banking industry – Kruger and Deysel, 2015} The outcome was determined by looking at the relationships that exists between CEO compensation, the company’s performance, general employee compensation, company size, its peers, the general market performance and the general level of inflation.

“Overall, there is a statistically significant positive long-term correlation between the JSE Banking Sector market performance and CEO compensation,” Kruger explained. Three out of five South African banks in the study showed a significant correlation between performance and compensation, giving merit to the CEO compensation rates at these banks. However, two of the five South African banks showed CEO overcompensation when compared to both company performance and the CEO compensation packages of their peers. Kruger says, “In both instances, CEO compensation significantly topped company performance measured over a seven-year period.”  When Kruger did an analysis to determine the underlying motivation for compensation, some justification was provided. However, the absolute levels of compensation remain contentious.

“In any organisation, it is important for shareholders that profit is generated,” says Kruger. “A key motivational factor in achieving this is that chief executive officer compensation should be linked to performance levels. Employee salaries have less of a connection with performance. This means that a relatively insignificant portion of an average employee’s salary comprises variable remuneration, in comparison with a CEO’s compensation, which includes a substantial variable portion.” Kruger highlights the recent phenomenon of certain CEOs willingly relinquishing their bonuses, the variable portion, when the companies they lead perform poorly. In 2012, Investec CEO, Stephen Koseff, had his compensation cut by 87% while also asking not to be considered for a bonus. In the 2012 financial year, ABSA’s CEO, Maria Ramos, deferred her R14 million incentive bonus. She would receive the bonus in shares in three equal portions in the next three years.

Kruger concludes that deeper investigation of correlative salary increases of CEOs and employees would inform future business discussions of organised labour and the issue of minimum wages.