Deloitte proposes single figure standard for executive pay design

6th November 2018 By: Schalk Burger - Creamer Media Senior Contributing Editor

Professional services firm Deloitte has proposed that the so-called single figure metric, which is a requirement of King IV reporting standards, become the standard to inform executive pay design – allowing internal and external comparisons on pay, as well as informing the shareholder and societal debates around what is fair and reasonable executive pay.

Deloitte Africa Actuarial, Reward and Analytics leader Leslie Yuill in a statement summarising the proposal, on Tuesday, explained that the single figure metric comprised a director’s or prescribed officer’s salary, benefits, short-term incentives, long-term incentives and performance awards.

The single figure metric could play a broader role in establishing a standard with which companies can compare themselves against each other with regard to executive pay, he said.

Using this as a standard would allow companies to apply some level of flexibility in pay design, while staying within an acceptable single figure parameter. This was in contrast to the current situation in which companies were supposedly conforming to or being dictated to conform to many and varied benchmarks, which were “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 the perspective they view it, whether internally, externally or by sector and/or societally,” said Yuill.

The recommendation is part of the 2018 Deloitte Executive Compensation Report, which is an analysis of the top 100 listed companies and 150 second-tier listed companies.

“The Deloitte report confines itself to a qualitative and quantitative review of the nature and disclosure of executive compensation, without commenting on its relevance or impact on societal considerations,” Yuill emphasised.

According to him, there remained a question mark over how well shareholders were equipped or motivated to take on the role of addressing and administering to societal concerns, which might not necessarily coincide with shareholder value.

“The disparity in levels of top executive pay in relation to those of lower paid workers is a worldwide societal concern. This is particularly the case in South Africa, with its additional transformational needs and high levels of unemployment, which contribute to a powder keg of potential dissent and disharmony,” he explained.

Deloitte was of the view that in order to inform this debate now and into the future, the debate between stakeholders in South Africa required an authoritative and balanced overview covering recent years.

The Deloitte report predicted that King IV would engender increased levels of dialogue between companies and their shareholders. These should have a positive impact overall on the structure of remuneration policies, and quality of disclosure in implementation policies.

“Remuneration committees will have to continue to focus on the target setting process to ensure targets are appropriately stretching, as well as on the disclosure of these targets in relation to the pay-outs. We also expect to see greater vigilance around malus and clawback arrangements.”

Malus refers to the reduction of unvested or unpaid variable pay before the date that it vests, while clawback refers to compelling executives to repay amounts to the company that should not have been paid to them.

The King IV Report on Corporate Governance for South Africa became effective on April 1, 2017.