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CEO remuneration remains a complex issue – Deloitte

27th January 2020

By: Marleny Arnoldi

Deputy Editor Online

     

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Consultancy Deloitte has tackled the controversial question of whether CEOs in South Africa are being remunerated fairly in its latest ‘Executive Compensation Report’ for 2019.

The release of the findings of the report come at a time when executive pay continues to attract intense public and media scrutiny, locally and abroad, with much of the focus on the growing inequality between those at the top of the organisation and the general workforce.

“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,” says Deloitte Africa human capital associate direction Tyrone Jansen.

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, long-term incentives and performance awards – has to be disclosed.

In its remuneration report, Deloitte recommends that the single figure should not merely be a metric by which annual pay comparisons are made.

“It should be used 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 informing the shareholder and societal debates around what is fair and reasonable in executive pay,” the consultancy states.

According to Deloitte, using the single figure as a standard would allow companies to apply some level of flexibility in pay design, while 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 over time, 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 the best fit for its specific circumstances rather than just conform to an inflated benchmark across individual pay components,” says Jansen.

He adds that 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.

In support of this, Deloitte has developed a detailed guide for remuneration committees and chairpersons, 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, Jansen says 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,” Jansen states.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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