Executive pay returns to focus as report shines light on hypocrisy

EXECUTIVE directors awarded themselves considerably more than inflation-linked increases in pay during 2015, even as they called on workers to be responsible in their wage demands.

PwC’s latest remuneration report, released on Thursday, showed that executive directors of the largest JSE-listed companies had awarded themselves increases in total guaranteed pay of between 9% and 12%.

The report understates the full extent of the generosity enjoyed by executives, as it does not deal with variable pay, which can boost guaranteed pay between 30% and 200%, and which increased at much higher rates.

PwC director Gerald Seegers hints at the possibility of a binding vote on remuneration being introduced if powerful shareholders who are enabling current remuneration practices do not act.

The report shows up the absence of regulations aimed at restraining runaway executive pay in SA, in contrast to the big global economies. This means that the strongest sources of restraint on local remuneration packages are regulations aimed at controlling UK and US executives.

A similar report for the UK was also released on Thursday, the day after new Prime Minister Theresa May warned she intended to act on executive pay and urged UK executives to act.

“Concerns about executive pay now span the political divide…. Executive pay is a major source of distrust in big business, which is in danger of undermining companies’ licence to operate in the UK,” said PwC’s UK report. May’s plan for the UK includes employee representation on boards, a binding vote on pay by shareholders and improved levels of disclosure.

The South African report discourages the introduction of even binding votes, saying South African shareholders first need to have a better understanding of remuneration policies.

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“There needs to be a strong certainty that the shareholders who are given the right to vote are in a position to be able to critically analyse the remuneration policies and practices that they are expected to express a view on,” PwC says.

Shareholder activist Theo Botha counters that the more important groups to train are members of the remuneration committee.

In many instances, says Botha, who regularly attends annual general meetings, even the chairperson of the remuneration committee is unable to respond to questions. Botha says the best solution for all concerned would be to simplify remuneration packages.

“They are made complex so shareholders cannot understand them.”

The Public Investment Corporation, which is the largest investor on the JSE and actively engages on remuneration, did not respond to Business Day’s questions about the extent of its understanding of executive remuneration.

When it comes to shareholders getting value for money, the report shows the biggest losers are those in the mining sector. PwC says that in 2015 shareholders in the mining sector lost significant value, while executives continued to receive increases in their guaranteed pay. Shareholders in the financial sector got better value for money, with PwC reporting this sector “shows some positive correlation between company performance and total guaranteed pay increases”.

As for the global push towards disclosing the gap between the highest-paid executives and average-paid workers, PwC urges caution.

While the World Bank refers to a Gini co-efficient of 0.65 (the higher the coefficient, the higher the income inequality) in SA’s total population, PwC suggests it is more appropriate to use the Gini coefficient of the employed, which is 0.43.