PRETORIA – One of the reasons bank execs receive millions in total remuneration is the scarcity of skills and the impact of losing an executive to a competitor would have. Leadership skills, the complexity of the business and earnings performance also contribute. This is according to the chairman of Standard Bank Group (JSE:SBK)’s remuneration committee in his letter accompanying the Remuneration Report in the bank’s 2012 Integrated Report.
Bank executives’ remuneration remains in the spotlight worldwide, with criticism voiced over the levels of pay in some areas of the world. So much so that the European Parliament last week approved a bank bonus cap for the European Economic Area (and subsidiaries of banks with headquarters in the area) that will limit variable remuneration at a ratio of 1:1 against fixed pay – with the possibility to increase the ratio to 2:1 with 75% shareholder approval.
In Standard Bank’s case the report shows that after receiving a zero bonus in both 2009 and 2010, former Standard Bank CEO Jacko Maree took home R20.3m in variable remuneration two years ago. Last year his variable pay fell to R10.2m (despite “strong successes in most areas” according to Woods), bringing his total remuneration for the year to R18.102m. This year Maree stepped down as CEO and left the reigns to the two joint CEOs, Ben Kruger and Sim Tshabalala.
Of the current two CEOs, Tshabalala took home more in total remuneration than Kruger last year at R24.050m (versus Kruger’s R20.109m), but only because his variable pay is more. At R7.109m (13.3% increase on the previous year), Kruger takes home more in fixed remuneration than Tshabalala’s R5.85m (8.41% increase on 2011). See table below:
So how does the Standard Bank remco decide what to pay whom?
Woods explains that the Standard Bank Group remco does not use rigid scorecards, but rather that each member of the committee applies his or her independent assessment to a set of ‘spheres of required executive delivery’. The remco then makes “informed value judgements” based on these assessments.
The remco looks at leadership abilities, the external context, the relative complexity of the business under the leadership of a specific executive and earnings performance.
In light of the criticism voiced against remuneration levels, Woods writes: “Few critics of remuneration analyse the overall cost of losing a senior executive to a competitor. But it is greater than many believe.” Thus, he explains, when the remco evaluates an individual executive, it considers the scarcity of that person’s knowledge and skills and the premium placed on such a resource in the marketplace.
If you want to try and understand why some executives receive more than others, some insight might come from Woods’ discussion on the relative complexity of the business under the leadership of a specific executive. This complexity affects how that person is rewarded. “Some areas of Standard Bank Group are far more complex than others,” he writes. Some, he says, are subject to “highly rigorous regulatory oversight” and he also adds that certain African and international operating environments are more demanding of “individual skill and stamina” than others.
The other spheres that is looked at include the following:
- Earnings performance
Woods says that the skill in growing revenues across the spectrum of products, building customer loyalty, discipline in cost management and the pursuit of the board approved strategy (that includes a focus on Africa) are all vital components of earnings delivery. He states that the remco judges earnings relative to resources used to generate those earnings and also looks and sound risk management. Furthermore, comparisons to competitor performance are used, where appropriate, as markers.
- Share price performance
Woods says that share price performance is an area of prime interest to shareholders, but as a measure of executive performance it is not a good yardstick. It is still important as a measure over a longer time span as earnings growth is the foundation upon which share price appreciation rests.
- Leadership abilities
Standard Bank’s remco, according to Woods, looks at innovation, imagination and inventiveness and rewards the value created by these steps by leaders. He mentions personal passion and determination in driving the long-term goals of the bank. Individual integrity and evidence of ethical behaviour is also highlighted.
Woods concludes his explanation by stating that despite the remco’s “best efforts at making informed, sensible judgements on individual remuneration, however, ‘fair remuneration’ will remain a fluid concept, riding on people’s differing perceptions.”