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Patel’s plan to address the inequity of executive pay

It would be useful if the minister coincided his legislative challenge with news of widespread pay cuts for ministers and directors-general.
As a former trade unionist, Patel should rather use whatever influence he has to encourage his labour colleagues to impose some market discipline. Image: GCIS

Judging by the flurry of comments sparked by news that Minister of Trade, Industry and Competition Ebrahim Patel is finalising legislative changes aimed at narrowing the executive-worker pay gap, not many people believe government has a role to play in addressing this thorny issue.

As many commentators see it government has its own, much more severe, remuneration problem – totally inept employees at every level of government are being massively overpaid for generally low-quality work, in some instances no work at all.

That’s as may be. Certainly it would be a useful move for Patel to coincide his legislative challenge with news of widespread pay cuts for ministers and directors-general.

But why would he? The sad reality is that very few “overpaid” individuals in government – or the private sector – believe they are overpaid; or at least would implicitly admit to it by taking voluntary pay cuts.

Two extraordinary decades

Over the past 20 years the top level management of listed corporates, and to a lesser extent government, have enjoyed extraordinary remuneration increases.

In remarkably few cases have these increases been justified by the long-term performance of the underlying operation, whether a company, a department or a municipality.

The lucky beneficiaries of this system have one thing in common – their good fortune is being funded by other people.

Unlike the case of a private family-owned business, the largesse heaped upon executives of listed companies and government employees is paid by ‘someone else’.

In the case of listed companies it is the shareholders who shoulder the bill; for government employees it is the taxpayer. And the grim reality is that currently there is nothing within the relationship between executive and shareholder that would encourage the executive to be in any way restrained. Similarly for the government employee and taxpayer.

Gaming the system

In the case of listed company executives, any sense that these rewards may be inappropriately generous is addressed by the use of expensive remuneration consultants who are aided and abetted by headhunters and the members of boards’ remuneration committees.

In a remarkable example of self-dealing, remuneration consultants are paid generously by executives to tell the board how appropriate those executives’ pay levels are; indeed these consultants will frequently suggest that something more generous would be even more appropriate.

While Patel certainly does need to encourage government to overhaul its own pay system, that reality shouldn’t take from the fact that listed entities need to take a critical look at the cronyism that underpins its remuneration practices.

These practices do not reflect an efficient market at work; they reflect the ability of insiders to game the system in a way that steadily diminishes the very efficiency of that market.

Over the past 20 years fewer than a handful of executives – for example Bidvest’s Brian Joffe, SABMiller’s Graham Mackay, Shoprite’s Whitey Basson – have justified their generous rewards through the creation of sustainable stakeholder value.

Most of the others, who have been on the receiving end of payments that would allow several generations of their offspring to enjoy an indolent life of luxury, could have been passed over without any fear of corporate value destruction.

Held captive

Time and again, we are told we must pay these extortionate sums or risk losing great talent.

We are told this by the remuneration consultants and the members of the remuneration committees whose generous fees are tied up in that myth being sustained.

How is it possible that organisations with tens of thousands of employees are so dangerously reliant on a relative handful of individuals?

Are the boards and their human resources departments incapable of cultivating the necessary talent?

Of course it is not just the board members and the remuneration consultants who enable the system, it is the shareholders.

Shareholder impotence

And therein lies the greatest challenge – 21st Century shareholder capitalism does not allow the ‘real’ shareholders to vote on this or any other issue, instead it is the fund managers who collect tens of billions of rands from employees and savers who do the voting.

And the executives of these powerful big fund management institutions have more in common with their colleagues in listed companies than they do with their tens of thousands of clients.

How else could the system prevail?

How else could demands for accountability be satisfied by a contrived non-binding vote on remuneration?

The problem with Patel’s plan

Patel’s critics may however be right on one key issue: government might not be best placed to address excessive remuneration in the private sector.

To date government and regulatory interventions have generated unintended consequences that have created boons for executives.

Former US president Bill Clinton’s attempt to put a $1 million cap on US executive pay in the nineties propelled the use of even more generous share options; in SA mandatory disclosure of executive pay in 2002 was expected to trigger a sense of social embarrassment that would act as a restraint on pay levels, instead it bred a near-sociopathic reliance on benchmarking to justify any pay amount imagined.

As for disclosing the wage gap in SA – judging by Anglo American’s interpretation, that might prove to be ineffective: the global mining giant decided its secretarial employees in the UK were the poorest paid workers, not the miners in any of its operations across the globe as they were in a different jurisdiction.

A better way

Rather than go the legislative route perhaps Patel should try to shake up his colleagues in the Department of Finance and get them to goad the Public Investment Corporation (PIC) into action.

As one of the country’s largest JSE investors the PIC is well placed to impose some market discipline on its investee companies.

Why it has not chosen to do anything effective so far is puzzling.

Equally puzzling is why the trade union movement has chosen not to use its substantial investor muscle to exert some influence on the issue. Instead it has been happy to allow fund managers to aid and abet the growth of a socially destabilising wage gap.

As a former trade unionist, Patel should use whatever influence he has to encourage his labour colleagues to impose some market discipline.

Meanwhile he could look to address the problem on his own doorstep.

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COMMENTS   31

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Patel was appointed by Zuma and has purposefully had an agenda against business from day one. Agree that the biggest issue is government remuneration which should be exposed for the robbery of the hard working tax payer that it is. Hard to take ‘chicken man’ Patel seriously as he was the fella who banned hot chicken and slip slops during lockdown. What a joke and a pathetic excuse of a government minister.

Thanks Ann for opening up this discussion. I do hope there will be some constructive debate on this forum instead of using it as an outlet for deep frustration and anger.

Isn’t Patel’s initiative which is a much needed development an opportunity to insist upon a clear distinction in the government between the work of politicians (usually ministers or councillors) and that of top officials? Putting it crudely, politicians devise policy and top officials execute that policy. To execute competently requires a high standard of professionalism. The professionalism that existed prior to ’94 has been destroyed by the cadre deployment policy as we have witnessed repeatedly at the Zondo Commission.

I suspect this issue will be one of the prime problem areas that Zondo will focus on in his recommendations to put right any further attempts at State Capture. Thereafter pay top officials a fair wage and demand of politicians accountability for non-performance through dereliction of duty.

But simply focussing on pay disparities between greed at the top levels and resentment at worker levels extends problem areas; it doesn’t solve the problem.

Magda has consistently pleaded for the greed of capitalism to be tempered. She is spot-on. Our value is not measured by the size of our package. Ultimately it is measured by what the good book calls “doing what is right.”

Ronaldus, the people of South Africa have been dished out nothing but corruption and completely inept policy by the ANC for 30 years that makes life and business in SA challenging on a day to day basis. The mood music will tell you that there is now complete frustration as constructive debate is ignored by the ANC. Instead we get dished out ideas my ‘chicken man’ who couldn’t run a nursery school in the world. I think people deserve change and positive action and not words and policies that are clearly set to fail at this stage.

Appointed by Zuma and promoted by Ramaphosa.

All these harebrained schemes come with the approval and blessing of the New Dawn, including the R220 billion powership bonanza.

Could Dlamini-Zuma possibly have been worse?

Have to agree with you!

PAtel and the former Minister Rob Davies … both appointed by Zuma.
Both ran the Dti into the ground.

BOth could only focus on nonsense in this department…. either Clothes or Chickens… while Rome got burnt.

Nimrod Zalk is another culprit… this dude was special adviser to the Minsters.

What Cyril needs is a new team… with new thinking… and get rid of this ROT!

I have to agree with your comment about taking him seriously. The way they care mismanaging things it will be a miracle for anyone to make money to take a “bonus”. “Really” do we not have better things to concern ourselves with at the moment. Not surprising these comments came from the “Hot chicken and slop” guy.

What an idiot. Executive pay in the private sector is subject to supply and demand. If Patel has his way we can then expect our best execs to move where their talents are best remunerated – overseas. The nett loser will be SA itself but try explaining this to a communist.

A plonker that banned hot chicken????

Whahahahaaaaaa!

Lets see if he can do something more stupid.

the comrades stupidity knows no limits.

If he was a farmer he’d probably have the most fertile cows sent to the abattoir as their punishment.

Have a look at most any remuneration committee guiding principles. Fancier words but basically that the company will reward the hired help in the upper 10% or 20%.

Guess what happens to the mean paypacket after a few uears of all the banks paying their hired help at the upper 20% is obvious.

The old argument is that the nation will lose these precious workers (as opposed to entrepreneurs) to overseas. Right. At the rate SA executives screw up overseas expansion – not so much. Maybe they were more focused on the company sorting their citizenship and settlement than succeeding, but either way not covered in glory.

Solution : not sure. Sure as hell cannot rely on the honor / shame of the hired help

So glad that he will lead the way and reduce his own salary to R300/month (without perks) for a year to show us exactly how it is done.

You make a very interesting point. If one forgets the emotions for a moment and the fact that this is proposed by the same man who banned open toe shoes in the lockdown, one has to admit that there is something seriously wrong with executive pay in SA. Yes, the likes of Brian Joffee is worth his weight in gold, but what about the rest? For me, one of the biggest jokes was when the loss-making Hulamin awarded share incentives to its executives. Even the company secretary got some. How is he going to grow the business by e.g. keeping minutes of meetings and preparing resolutions? Obviously, the boys in the inner circle were just looking after themselves before retirement. (the 3-year share price is down 55%)

The racist, hypocritical ANC at their best. How about reducing cabinet size, which has way too many ministers and deputy ministers and their entourage, blue light brigades to make them feel important, etc. Then show by example what should be done.

Hey Ebrahim, Get your own state employees house in order first before stirring in other peoples pots!
Government employees have been enjoying numerous annual above inflation increases for years. Go sort out that mess first.

The wage gap, simplisticly, has three elements. Executive remuneration, wage and GDP growth.

The Unions should not come near in determining salaries at any level as they, as a collective, have destroyed more jobs and economic value, and a decline in overall productivity.

Unions should be dumped. They are useless.

The two biggest problems to correct are GDP growth and unemployment. Fix that and the rest will follow.

All the consumerism policies of grants increase dependancy on the state while the tax base is shrinking at an alarming rate. It is only a matter of time before Treasury will have to borrow to pay grants, not to speak of the bloated and over-paid public sector.

Government has not the political will to do what they should be doing to stimulate economic growth and attract investments.

Cut the dead wood or surplus employees from all spheres of public sector, including SOE’s. Stop pumping money into vanity projects such as SAA.

Use the funds released to invest in infrastructure projects where jobs will be created. There is no benefit to the country by having a bloated, overpaid and unproductive public sector and SOE’s. Apart, of course, to retain votes.

If Patel has his way the brain drain will accelerate exponentially with the consequencial shrinking of tax base, knowledge, skills and entrepreneurial wherewithal.

Bottom line!

Start with the cabinet! We have one of the biggest, if not the biggest in the world, especially in relation to population size. Cut the number of tiers within government. Do we really need national, provincial and local?

Let’s start with your pay Patel you blood sucking Government bureaucrat ! You add no value to our lives ….

Pay cuts for politicians? Ha hah ha ha ha ….. It will be a cold day in hell. Politicians are happy to cut any pay AS LONG AS IT IS NOT THEIRS.

Why does the government find it necessary to cap executive pay while they enforce minimum wages for others? Where has price-controls ever reached the intended goals? Price controls have unintended consequences, as it destroys supply. Minimum prices with labour laws created our unemployment catastrophe. When Mugabe used maximum prices for bread to combat inflation, the shelves ran empty.

We are not the old Soviet Union where they could temporarily enforce wage equality. Our borders are porous, workers can cross our borders in both ways to create either an oversupply or undersupply of labour. Workers can follow the price signal across borders to find the most rewarding opportunities. The minimum wage destroyed employment opportunities locally. The executive-worker pay gap says only one thing – we have an absolute oversupply of low-skilled labour and a shortage of skilled and competent executives.

The market mechanism that drives the executive-worker pay gap also ensures the efficient delivery of products and services to consumers. All the government monopolies that use the law to sidestep the market mechanism are responsible for our economic malaise and unemployment problems. The government itself, the Defence Force, Eskom the rest of the SOEs and all the municipalities are legally enforced monopolies where the market mechanism is impotent to enforce productive and efficient service delivery.

Government control drives out entrepreneurs. Price controls destroy supply. The consumer suffers when the government intervenes to bring “equality”.

Perfect argument = “The executive-worker pay gap says only one thing – we have an absolute oversupply of low-skilled labour and a shortage of skilled and competent executives.”

This one is beyond stupid……

The deep rooted communist agenda is coming to the fore. Remember all our minsters are indoctrinated into such thinking.

The ideals of communism; does not make provision for greedy politicians.

Government: 58% of tax income goes to 2.5% of the population, the government employees. They are eating the poor peoples lunch.

Private sector: Fund managers like the PIC, Sanlam, Mutual, Alan Grey, Investec and others have failed in their fiduciary duty to their clients to vote against these executive remunerations.

My mantra is: the government has declared war on its citizenry through iniquitous taxation, ignorant legislation, and lack of service delivery, caused mainly by cadre deployment. This kind of pronouncement by the Honorable Minister (sic!) – whose ineptitude cannot be curtailed, it seems – continues to destroy the credibility of those who appointed him. Are we sickened by the unearned, value-destroying remuneration packages of failing companies? Absolutely. Should we have legislation limiting remuneration? Absolutely not. Will the minister have his way to pass this lamebrained legislation? Unfortunately, yes.

Is it not more urgent to cap the earnings gap between the income of billionaire ANC politicians and their unemployed ANC voters?

Specifically, since your party strives to achieve equality? Or are some people more equal than others?

Well done Ann for your constructive analysis of a issue that needs urgent addressing. It is difficult to justify anybody receiving R100,000 per day every day of the year and year after year (based on R36.5m remuneration).
The suggestion that the PIC and Asset Managers should take a more active role regarding remuneration policies is spot-on. The question is how workers (pension contributors) and retail investors can influence the PIC and Asset managers…
What a pity that your readers engaged in Patel-bashing rather than constructive debates on the issue.

You are looking at this back to front. The correct way to approach this is singly to fix the entire spectrum of the education system so that more high quality individuals come to the fore to balance the supply and demand of executives. To intervene as government here is as bad an idea as setting a minimum wage (which is also fixed by better education but also better birth control to prevent the oversupply of cheap labour forthcoming from a home where it is impossible for a parent to give 10 children a future). Both caps will have cons outweighing pros in the long run. This is simply lazy communist thinking to try and regulate something right in this way – it absolutely will lead to more misery. Of course the pay gap sounds terrible but you can fix it the way these tools are trying fix it solely by closing the countries borders and preventing skilled people to leave as they sure will when the hundreds of bad attributes of living in SA outweighs the pros of at least a huge salary. Why is it so hard for people to understand the stupidity of this.

Those who can do, those who cannot – become trade unionists like the Commie Patel. Def needs a bouquet of 12 fresh PK’s

When you are in an effective government free from any corruption and can guarantee extreme effectiveness coupled with a lean parliament where the governmental overheads per capita are far less than anywhere else in the world and the total cost difference between the head of state and the deputy clerk at the counter of home affairs sets the standard, then you will be in a position to advise.

Until the above happens, this approach by Mr. Patel can be treated with the disdain it deserves.

Excellent business people are very hard to find as there has been a massive brain drain in the past decade. The law of supply and demand prevails in what is supposed to be a free economy.

An Economy that is unfortunately taxed to death to support a massive Governmental Overhead that must be cut by at least 60% to be even vaguely regarded as slight value for money.

Minister Patel, stay in your lane Mate!There is more work required there than anywhere else, Corporate pay saga is a drop in the ocean compared to that mess in your lane! Let “Supply and Demand” take care of things that Communism cannot!

Do you want more cash leaving the country, because this is exactly what will happen, the corporates will set up offshore if not already, pay there Execs in part of full there, too easy and legal!

Don’t even indicate, just stay there, it’s better for the country!

End of comments.

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