Bobby Godsell – Establishment of a Commission on Executive Pay

Johannesburg – Former Chamber of Mines president Bobby Godsell announced more recently that South Africa should consider establishing a commission on executive pay, to ally with a similar initiative in the United Kingdom

Those familiar with the executive remuneration principles as espoused in the King Report on Governance for South Africa 2009 will however, argue that South African companies are at the forefront of international best practice in this regard. A further comparison between the King III principles on executive remuneration and those of the UK Combined Code would certainly attest thereto. Why then the call to mirror the UK endeavour in terms of establishing a commission on executive pay?

There is a growing perception that King III does not go far enough in terms of defining best practice with respect to companies in the financial services sector. In response to shortcomings identified in the wake of corporate failures in this sector duly precipitated by the global economic downturn, regulators across the world have been issuing codes of best practice espousing best practice principles in this area.

In August 2009, for example, the FSA in the United Kingdom became the first regulator to publish a formal code of practice on remuneration for the executives of financial services companies. We believe that it is only a matter of time before a similar code is published in South Africa and more so against the backdrop of the CSA executive remuneration scandal and all three major global ratings agencies having downgraded their outlook for South Africa, saying President Jacob Zuma’s government is on the wrong track with graft, a wide budget deficit and a poor education system clouding the future.

The UK commission on executive pay was an independent body established to research executive pay. Its recommendations included executives being paid basic salaries with one additional performance-related element, and that the top 10 highest executive salaries in each company be published. The commission also recommended that employees have representation on executive remuneration committees, and that shareholders cast “forward-looking” advisory votes on executive salaries which are binding for three years.

These themes are echoed in King Report on Corporate Governance for South Africa 2009 and three general principles in respect of the remuneration of directors and senior executives are set out:

  • Companies should remunerate directors and executives fairly and responsibly
  • Companies should disclose the remuneration of each individual director and certain senior executives
  • Shareholders should approve the company’s remuneration policy.

Where then do the fundamental differences between the King III principles and the commission’s findings lie? The commission’s findings are certainly more definitive with regard to the mix of executive pay while the King III report has opted to provide a broader principle which states that all fixed pay should relate to the contribution of the individual with variable pay relating to performance against yearly objectives. The same can be said for the finding as it relates to the membership of the remuneration committee. As for the disclosure of salaries and the approval of the remuneration policy there is alignment which once again attests to the consistency strived for by King III between local and international governance when formulating its code.

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