Executive Pay Caps

The issue of executive remuneration continues to fetch headlines within the corporate landscape of South Africa. In a recent article we probed the announcement made by Former Chamber of Mines president Bobby Godsell that South Africa should consider establishing a commission on executive pay, to ally with a similar initiative in the United Kingdom.

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

More recently, Business Day reported that Business Leadership SA said it was committed to devising a code of conduct on remuneration and labour practices for its members that would include “sacrifices by management”. More examination and debate is needed before South Africa introduces any sort of code of conduct on remuneration and labour practices, according to Martin Westcott, MD of P-E Corporate Services. “The necessity and relevance of the code needs to be carefully interrogated before we spend more valuable executive hours negotiating the details,” Mr Westcott said.

This does however raise the question as to the adequacy of the governance principles espoused within King III as they relate to issues such as executive pay disclosure and the requirements that companies remunerate directors responsibly. The code requires companies to disclose details on pay policy including how incentives are to be computed in advance of each financial year, as well as obtaining shareholder approval on executive remuneration policy and practice.
Clearly a more robust, quantitative framework is being sought given the recent proposals made by the Minister of Economic Development, Ebrahim Patel, to limit executive pay at a set total compensation level. The implementation, however, of a code seeking to regulate the quantum of pay or the relationship between executive pay and pay at lower levels, will necessitate the calculation of a whole range of data to take into account factors such as labour intensity, high-tech knowledge-based workforces and the like,” Mr Westcott said.
He said that experience showed rules and regulations would not necessarily reduce or limit executive pay levels as business is “adept” at finding ways around regulations and would do so if executive pay levels were legislated.“Executive pay structures are complex and to attempt to develop rules to regulate every eventuality might prove to be naive. Different companies have different challenges with regard to retention, severance and other issues,” Mr Westcott concluded.
I think it is encouraging to see that the shareholder revolt over executive pay in the UK and the US is slowly filtering into SA, where listed companies are facing more intrusive investor oversight of their remuneration policies and practices. Clearly something drastic needs to be done especially when the average CEO is still earning 52 times more than the entry level worker in South Africa, in 2012.

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