Just days after announcing that its top executives would follow President Cyril Ramaphosa’s example and donate an effective one month’s salary to community support programmes, Absa released details of its latest long-term executive incentive scheme which reveal that the same executives are set to score tens of millions of rands in bonuses.
Absa last weekend fell into line with other banks that had announced they would back the president’s pay-cut initiative, saying that the group’s executive directors and prescribed officers had decided to make contributions in their individual capacities.
The bank’s top five executives said they will forego 33% of their monthly salaries for the next three months and donate the amounts to the Solidarity Fund as well as the group’s Covid-19 community support programmes.
“The scale of the challenge requires that we work together to find solutions that can help us fight this massive threat to public health and our economic prospects,” said group CEO Daniel Mminele.
On the basis of the 2019 remuneration figures available in the recently released annual report, the donations would be equivalent to around R750 000 for the CEO and up to R500 000 from each of the other executives.
Mike Martin of Active Shareholder, which advises NGOs how to vote at AGMs, says the timing of the incentive share announcement was “unfortunate” for Absa.
“Presumably it is part of the executives’ employment contract and has to be disclosed timeously.”
He adds that while the Covid donations are significant, they do pale against the tens of millions of rands each of the executives stands to gain from the long-term incentives.
The share-based incentives, which will vest over a three- to five-year period if performance conditions are met, are valued at a combined R51 million for the five executives.
Mminele, who took up the top position in mid-January, was granted R15 million worth of shares; Jason Quinn and Arrie Rautenbach were granted R12 million of shares each; and Charles Russon was granted R9.1 million.
The executives are also set to collect a combined R22 million worth of deferred awards if the performance conditions are met.
The payouts could be considerably more generous given that the R51 million figure is based on a grant price of R92. Absa says the number of shares awarded is fixed with reference to the 20-day volume-weighted average price preceding the grant date, which was April 1.
The Absa share price slumped to a 10-year-plus low of R72 on March 27.
For much of the past five years it has traded above R150, reaching a high of R200 in March 2018.
This means that if the Absa share price does nothing more than recover to levels seen last year, the value of the long-term incentive payout will be over R100 million and the deferred awards will be worth R44 million.
The long-term incentives and deferred awards are only part of remuneration packages that also include substantial annual salaries and short-term incentives.
The performance conditions attached to the grant of the share incentives and the deferred shares require Absa’s return on equity to be above its cost of equity and its growth in headline earnings per share to be significantly above nominal GDP growth. A third financial metric deals with the bank’s cost-to-income ratio.
However Absa has warned shareholders that the performance targets, which are contained in the latest annual report, could be revised. “As we review and rebase our medium-term plan to take account of the impact of the Covid-19 pandemic, it may be necessary to review the targets … to ensure that these are appropriately aligned to the revised plan,” said Absa.
Investors across the globe have raised concerns about companies granting long-term incentives during the most severe market crash seen in decades.
If the market rebounds from the current levels for no reason related to specific company performance, executives are in line for potentially huge and undeserved windfall gains.
Such gains could lead to widespread public backlash.
Martin warns that remuneration committees will have to guard against such gains while also ensuring that they retain motivated and effective executives.
He points out that the recent slump in the share price has reduced the value of previous long-term incentive share grants and could create liquidity problems for executives facing related tax liabilities.
Active Shareholder will be voting against both the remuneration report and the remuneration implementation report, citing a number of concerns in its proxy advisory note, including the limited link between the bank’s performance targets and its stated strategy.