Mind the (wage) gap

SEC’s pay ratio rule and UK’s ‘say on pay’ vote may find their way to SA.

Concern about the growing wage gap in South Africa may accelerate the introduction of more stringent regulations governing executive remuneration practices.

More than eyebrows were raised over the past few months when several companies in various sectors revealed the massive pay packages of their CEOs, while inequality continues to grow and the country is engulfed in its most damaging and protracted strike ever.

Last week Anglo American Platinum’s (Amplats) Chris Griffith could also not have played a worse hand when he tried to defend his R17.6 million annual salary, while 70 000 workers, many of whom are employed by Amplats, demand R12 500 per month or R150 000 per annum.

I have no opinion on the fairness of Griffith’s pay package, but the disparity between the highest and lowest salary in his company actually epitomises the inequality debate in the country.

The topic is not only a hot potato in South Africa. There is mounting fury against the perceived exuberance of executive pay all around the world and has even led to a referendum in Switzerland. It has also led to the formulation of new regulations in the UK to promote increased shareholder participation and in the US to highlight the wage gap within companies.

The new US Securities and Exchange Commission (SEC) regulations are especially interesting. They were introduced late last year and flow from the infamous Dodd-Frank Act. The commission proposed a new rule compelling companies to not only publish detailed information about their executives’ pay packages, but also how they compare with those of average employees.

At the announcement of the new rule, SEC commissioner Luis A Aguilar said the existing rules compelling companies to provide details of their CEO’s salaries might have had the opposite effect as it provided a good benchmarking tool for its peers. “If comparing CEO compensation solely to the compensation of other CEOs can lead to an inefficient upward spiral, then comparing CEO compensation to the compensation of an average worker may help offset that trend.”

Aguilar justified the spiral with similar statistics published in the latest PwC Executive Remuneration Report which shows that in 1950 the average difference or pay gap between the CEO and the average employee of an S&P500 company was 20 times. This ratio has steadily increased to reach 42 times in 1980, 120 times in 2000 and 204 times in 2012.

The PwC study, which was published in July last year, also found that in South Africa the gap between executives and the lowest-paid employee in South Africa is approximately 53 times.

Just as a comparison, Griffith’s annual salary of R17.6 million is 117 times higher than the R150 000 demanded by the striking platinum workers.

UK Regulations

The UK also introduced new regulations. In October last year Vince Cable, the British business secretary, made a vote by shareholders on a company’s remuneration policy binding. The vote was dubbed the “say on pay” vote and specified that 50% of shareholders had to vote in favour of a company’s pay policy.

Previously, such a vote was not binding, as is the case currently in South Africa.

It did not take long for this new regulation to claim its first victim. Last week the shareholders of the Jersey-based company Kentz were the first to block the company’s remuneration policy when holders of 51% of its shares voted against it. They were especially unhappy with plans for “discretionary” bonuses for executives.

This shareholder victory followed close shaves (and much media attention) for several other companies such as Hiscox, Standard Charted, AstraZeneca, National Express, Pearson and BG Group where holders of more than 30% and in some cases 40% of the shares voted against their respective policies.

South African regulations

It seems as if South Africa is slightly behind the curve of these international remuneration developments, but it could be fair to assume that those regulations will flow through to the local market.

In South Africa companies must publish the remuneration packages of all directors, and there is a non-binding vote by shareholders on remuneration policies.

This may however change quite quickly. The JSE normally follows regulatory direction from the UK, and it can be expected that local regulators are looking at Cable’s new regulations. It would be interesting to see whether local regulators also consider the new SEC regulations to show the wage gap, as it seems to be such a relevant issue in South Africa.

Proactive approach

The Remuneration Committees (Remcos) of listed companies must carefully consider these regulatory developments. It could be beneficial if they are perceived to be more proactive, especially in terms of addressing the wage gap.

Last year EY conducted valuable research into the perceptions of remuneration committees. In states in its Remuneration Governance in South Africa survey that remuneration committees have placed the wage gap as the third most important area of focus. It was only trumped by other Remcos priorities such as the “link between pay and corporate performance” and “performance conditions for incentive schemes.”

This may pose a significant challenge to Remcos, as many of the largest mining and manufacturing companies rely on “affordable” labour to compete internationally. It also takes exceptional talent and skills for a CEO to operate such a business profitably.

The introduction of a wage gap indicator could therefore greatly influence decisions on the remuneration of the CEOs and lowest paid employees. Do not be surprised if there are demands to have the publication of this indicator made mandatory.

I have always been a proponent that executives are handsomely rewarded for their toil, especially if they are very good. I think this is a common perception.

Unfortunately, not all executives are exceptional, and it irks many stakeholders to see ‘average’ CEOs rake in millions without a reciprocal performance of their companies.

Company boards and their Remcos need to consider their remuneration policies carefully, especially in the light of more regulations that are heading to South Africa. Hopefully we will see some proactive steps from leading companies, or this hot potato will just become hotter and hotter.

As an aside, see why PPC CEO Ketso Gordhan and 60 other PPC execs took a pay cut.

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