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Proposed bill amendments could expose SA’s wage gap

Public and state-owned companies will have to disclose highest and lowest paid employee salaries.
The new disclosure requirements could encourage companies to move low-paid employees off their books through the increased use of outsourcing. Image: Shutterstock

The Companies Amendment Bill is expected to make some progress during 2021 after apparently stalling somewhere along the legislative process during 2019 and 2020. Unless watered down before enacted, some of the proposed amendments might prompt a level of restraint so far missing from executive remuneration in South Africa.

One of the most significant sections of the bill, and likely to be one of the most contentious, are the proposed changes to Section 30 of the Companies Act relating to ‘Duties to prepare directors’ remuneration report’. If enacted, the changes will require public companies and state-owned entities (SOEs) to disclose the details of the highest and lowest paid employees in the company.

The proposed amendment, which reflects the efforts of the labour movement and some academics, will provide the first-ever detailed insight into the extent of the wage gap at individual company level in South Africa.

The Amendment Bill requires public companies and SOEs to provide “the remuneration including share options and bonuses of the employee of the company with the highest remuneration, be it the chief executive officer or any other individual holding any prescribed office in the company … ” The company/SOE will also have to disclose, in its remuneration report, “the remuneration of the employee … with the lowest remuneration in the company”.

In addition “the average and the median remuneration of all employees and the remuneration gap reflecting the ratio between the lowest paid and the chief executive officer or the highest remunerated employee in the company” must be disclosed in the directors’ remuneration report.

While labour legislation has required companies to maintain detailed records of pay levels, there has been no requirement to make these details public.

Unless corporate lobbyists are able to overcome trade union pressure and manage to water down the proposed amendments to the Companies Act, the much tougher disclosure requirements – which are expected to reveal extremely high pay gaps – are likely to add to calls for restraint on corporate executive pay. So far these calls, which have not had the investor muscle of the trade unions behind them, have been ignored by the powerful executive remuneration industry which includes remuneration committee members and consultants.

Mike Martin, head of research at Active Shareholder, a not-for-profit company that helps responsible shareholders to exercise their company rights, has welcomed plans for the improved disclosure. He urges companies not to bury the new information in increasingly long and over-complex remuneration reports.

“These reports have become so dense that valuable information is lost or, worse, covered up.

“Some reports only disclose information as footnotes which few read.”

If not watered down, the South African proposal will go further than any other country in the level of detail required.

At present the only major economies requiring much public disclosure are the US and UK.

UK wage gap

With effect from last year the largest 350 companies listed on the London Stock Exchange are obliged to disclose the ratio of CEO salaries to pay at the 75th, median and 25th percentile of the company’s UK employees. The disclosure was effective from the 2019/20 annual reporting period. Closed-end investment funds and companies with fewer than 250 UK employees are not covered by the requirement.

A recently-released analysis of the first set of disclosed ratios by independent UK think tank The High Pay Centre reveals that the UK’s retail industry dominates the companies with the highest ratios between CEO pay and lower- as well as median-quartile employees. The report ‘Pay Ratios and the FTSE 350’, notes that listed retail sector companies tend to be large and to employ more low-paid staff than most other industries. Retail companies also tend to employ a high proportion of under-25s, to whom the national living wage does not apply.

The ratio between the CEO of online retailer Ocado and its lower quartile employees was an eye-popping 2 820. However this was dramatically skewed by the effect of the maturing of an incentive scheme that resulted in its CEO Tim Steiner receiving a £58 million (around R1.2 billion) payout. The company said this was a once-off payment, however commentators remarked that while Steiner’s was extreme in value, payouts on maturing incentive schemes are a regular part of executive remuneration.

Even if Ocado is excluded, the retail sector has the highest gap between CEO pay and the lowest paid employee in the UK.

At retailer Tesco the CEO is paid 355 times that of an employee in the lowest quartile, at JD Group it is 348 times, at WHSmith it’s 239 and at Morrisons it is 230 times. The retail sector also has the highest ratio between CEO and median employees.

The financial services sector – which tends to have lower numbers of employees and employees who are older and more skilled than those in retail – has the lowest average CEO to median employee ratio, at just 35:1.

The report cautions against comparing different companies without fully understanding their respective business models.

“For example, differing reliance on indirectly employed workers who are not included in the pay ratio calculations can make the pay ratios of two ostensibly similar companies look very different.” BP and Shell, two major FTSE 100 oil companies with similarly high CEO pay levels, have very different ratio sizes. BP has a CEO to lower quartile employee ratio of 543:1 whereas Shell’s is 147:1. “This is because Shell franchises its petrol stations, meaning that low-paid retail staff working at petrol stations are not included in its pay ratio calculations, whereas BP retail workers are directly employed and included in the calculation,” explains the High Pay Centre.

Outsourcing risk

This point raises concerns that the new disclosure requirements might encourage companies to move low-paid employees off their books, through the increased use of precarious outsourcing arrangements, to avoid the spotlight. Active Shareholder’s Martin agrees that pressure to close the wage gap could lead to companies outsourcing functions such as cleaning and security.

In its report, the High Pay Centre recommends that outsourced workers be included in future pay ratio calculations.

PwC’s misleadingly modest figures for JSE companies

In its annual executive directors’ remuneration report released last year, audit firm and remuneration consultant PwC calculated that the median pay of the CEO of a JSE-listed company is only 18 times that of a semi-skilled employee and 24 times that of an unskilled employee. These misleadingly modest figures were derived by using a median figure for CEOs of all listed companies and by excluding bonuses and long-term incentives paid to executives.

The exclusion of bonuses and long-term incentives was particularly remarkable given that they make up at least two thirds of an executive’s remuneration.

UK companies are required to disclose bonuses and incentives, and the proposed amendments to the SA Companies Act is clear: “… the remuneration including share options and bonuses of the employee of the company with the highest remuneration, be it the chief executive officer or any other individual holding any prescribed office in the company as may be specified in terms of Section 30(4) and (6) of this Act.”

The proposed amendments are also clear that it is remuneration relating to individuals and not the median of groups that has to be disclosed.

Read: Is variable pay guilty of inflating the wage gap?

Unintended consequences

Another proposed amendment contained in the Companies Amendment Bill that is likely to shake up the remuneration industry is the requirement that members of a remuneration committee resign if their remuneration report is rejected by at least 25% of shareholders at two successive shareholders’ meetings.

The board must appoint a new committee within 40 business days and none of the directors who resigned are eligible for reappointment to the remuneration committee for two years.

Read: Naspers directors approve their own pay

One unintended result of this proposal could be to chill shareholder activism on remuneration.

To date the vote on remuneration policies has been non-binding and has been of little or no consequence other than virtue-signalling by institutional shareholders.

Ironically the proposed amendment, which introduces consequences to the vote, might curb this activism given institutional shareholders’ reluctance to engage forcefully with their investee companies.

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So then what??
Vilify the senior people in organizations??
Shame them for being successful??
Tax them to death??
Or simply force them to pack up and go to places that will appreciate their skills??

It is long overdue.

It will in my opinion show that we are paying first world salaries to some state employees that cannot deliver much or are ghost workers.

I suspect very shocking high numbers in some state salaries.

It is quite ironic how defensive supporters of capitalism react when there is a possible threat to their comfort zone…is it really fair to pay the lowest paid person at a retailer R3500, but the CEO R54 million? If people are happy that their remuneration is fair and equitable for their labour, they shouldn’t have anything to fear. I support the amendments 100%.

Interesting article, if SA uses the highest of the mentioned UK Ratios of the 355 x R3,200 = R1,136,000.00 a month, that figure seems rather low. The reason for this would be that to run a successful modern company you would need to pay for the talent and compete internationally.

South Africa’s highest paid person was Capitec CEO Gerrie Fourie, earning a cool R56,6 million. That means there would be a ration of 17,687.5. Maybe my figure is wrong but even if the minimum wage at Capitec was R6,500.00 a month it would still be around a ration of 8,707.

To reflect the UKs Highest Ratio of 355 a SA employee would need to earn R159,436.61 a month.

https://briefly.co.za/33131-who-highest-paid-ceo-south-africa.html

My comment might be a bit screwed because this is something which i have not researched properly, however i am sure that South Africans with Middle Management Skills with find both higher paying jobs overseas easily and a better lifestyle.

Yes , the CEO earns more (much more), than the lowest paid employee.

The system works. You boss earns more than you , that (hopefully) motivates you to do a better job and to earn what he/she earns.

If you do that through all levels in an organisation , then the pay gap is huge.

Then , you look at what the market is paying as well , which further pushes up executive pay.

It’s supply vs demand and simple economics.

There is an abundance of unskilled workers at the bottom , therefore they are paid accordingly.

Some execs , make it big on the back of a buddy buddy system or being some political type snake. That does happen , but the overwhelming majority is just good old fashioned hard work, from varsity to the workplace.

In a free-market society, where willing consumers daily use the market mechanism to vote with their money, material inequality is simply the manifestation of the inequality of mindset. The consumers or clients, and not the shareholders and the Board, ultimately determine the different levels of salaries and wages. The worker who plays the most important role in serving the consumers is rewarded accordingly by the consumers. The consumer does not value time. The consumer values value. Every worker spends a day at work, but some add more value than others. The consumer rewards productivity, not presence.

In a socialist society that chases this mirage of equality and social justice, they have to use force to equalize the thought processes and mindsets of people. A system can only produce material equality if it uses coercive mind control first. They used the Gulags to enforce this process in the USSR. This is why material equality and freedom of choice never go together. This quest for equality takes us on the road to slavery.

This presents the basic problem with modern democracies – when the voting majority has the victim attitude, also known as the slave mentality, they will inevitably enslave themselves, as well as the rest of society.

I agree with you.

Let’s take golf as an example . The person with the best score wins, the course is exactly the same for everyone. Why are there winners and losers ? Well some worked harder or are just more talented. That’s life.

Why don’t we take amateur golfers that hit a 102 in a good round , then allow these guys to play in the masters. Well, we don’t because they are not up to scratch (I know). If they were , then they would compete and be compensated accordingly.

Great CEOs are not going to be attracted to labour intensive businesses. Great entrepreneurs will not invest in labour creating businesses. Great private companies will not go public. Expect mechanisation.

Ignoring the politics, it would be useful information for users of financial statements to know more than that described. I would like to see a table showing how many workers make up each 10% of total salaries and wages.
2000 are first 10%
1600 are 11-20%
….
5 are 91-100%

We get far too little operational information in SA. Have a look at for example Apple’s quarterly numbers and how much data one gets on volumes and margins in all the business lines and geographic segments. They give LOTS of data in simple black text & tables and don’t waste 90 pages on glossy nonsense praising committees and the hired help.

Plus another 40 pages on how wonderful their Corporate Social Responsibility Initiative performs…

Ann Crotty made a good point in the article about outsourcing work or comparing Shell to BP. Shell’s report obviously looks better.

More legislation mostly hampers growth. I read this article because the title made me roll my eyes. This type of legislation just gives unions more firepower and socialists (or someone leaning a bit more left than right) a reason to be outraged.

Even something that sounds as great as a minimum wage has pitfalls. For example, an unskilled high school student is unable to obtain part-time work because he/she cannot be paid what they are worth because of the minimum wage. Do you want 98/100 people employed with wages ranging from R10 to R30 an hour or 60/100 people employed with wages of R20 an hour, minimum?

You have made a very valid point.

We can either have high employment with low wages or low employment with high wages but we cannot have both. SA needs to have higher employment or face the consequences of crime, feminine and more demonstrations.

Contrary to belief when government impose regulation and price controls the cost of goods actually goes up instead of remaining the same. Why would anyone spend more on the further develop a product or compete in the that product range just to be the same as everyone else?

Tiaan : it is offensive to argue about paying people R15ph instead of R20ph (2400 vs 3200 per month) when the hired help at the top “earn” R50m per year – R26,000 per hour every hour of every work day.

The result is inevitable when most pay committees have a strategy document that says they want the best and will pay in the upper quartile of executive salary. Everybody cannot pay in the top quartile! Simple maths

Instead of finding ways to create jobs and getting overseas companies to invest in South Africa the state concerns themselves with wage gaps. What clowns we have in the government.

If the intention is to raise lower paid workers salaries, the law of unintended consequences says that the lower paid will be outsourced or automated to reduce the pay ratio.

Relative remuneration totally misses the point. A company that pays well and does well for shareholders is still criticised because low paid workers earn so much less than the CEO.
In public markets, the focus should be on instances where where ‘insiders’ (ie Executives) do extremely well compared to other stakeholders (including shareholders and general employees).

End of comments.

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