Executive Director Remuneration increases at a slower rate than previous years

PricewaterhouseCoopers (PwC) research shows that in the last 12 months the total remuneration paid to executive directors of companies listed on the JSE has increased, although the increase is generally smaller than in previous years. However, this has done little to narrow the executive pay gap which remains a serious and controversial issue.

Gerald Seegers, PwC South African Director: Human Resource Services (Tax Division) notes that SA has not seen the pay freezes imposed elsewhere in the world, particularly in the UK, and the financial services sector in SA has not experienced the restraints and cut backs evident in this sector globally. “Our research shows that, in the last year, the total annual remuneration (base pay, benefits and performance bonus) paid to SA executive directors in the financial services sector increased by 7%. While this is much smaller than 2008 (+23%), it is still an increase. By way of comparison, base salary increases awarded to executives of FTSE 100 companies over a similar period were limited to around 1% and the median bonus payment made to FTSE 100 company executives was 0% of salary.

“It is also interesting to note that performance bonuses paid by large- and small-cap JSE listed companies in 2009 have fallen. For example, the median performance bonus paid to executive directors of the large-caps fell from R2,9 million to R2,4 million. The small-cap bonus median fell from R1,76 million to R974,000. This appears to reflect the difficult economic conditions that many SA companies have faced over the last year. However, in the industrial sector, the economic downturn was not always reflected in the extent of executive remuneration reduction, and some companies, especially the mid- and small-cap industrials, and also the mid-cap financial services companies, reported higher packages notwithstanding the downturn.”

In its Executive directors – Practices and remuneration trends repor:, South Africa 2010, PwC details the packages of executive directors of various sized companies, as well as selected sectors. The data is drawn from information publicly available at close of business 30 April 2010.

Large-cap companies
For large-cap companies, the data shows yearly aggregate increases in guaranteed packages of 4% (2009), 31% (2008) and 14% (2007). The median guaranteed package (base pay and benefits) for an executive director of a large-cap company is now R3,9 million. In 2009, overall these companies reduced their performance bonuses by 18% (after prior year increases of 4% in 2008 and 43% in 2007), with the median performance bonus of a large-cap company executive director now at R2,4 million, falling from R2,9 million in 2008.

Medium/mid-cap companies
Aggregate increases in guaranteed packages for medium-cap companies reflect a steady increase of 12% (2009), 12% (2008) and 10% (2007). In this size of company, the median guaranteed package is R2,6 million, with the median performance bonus at R1,5 million.

Small-cap companies
Conversely, small-cap companies show a marginal tail off in aggregate increases in guaranteed packages of 12% (2009), 13% (2008) and 19% (2007). The average median guaranteed package for a small-cap executive director is now R2 million. In 2009, performance bonuses paid in aggregate to executive directors of small-cap companies reflect a trend more conducive to the then prevailing economic conditions, with a 2009 decline to a median bonus of R974 000, from R1,7 million.

AltX companies
AltX companies reflected an ongoing increase in guaranteed packages for the period 2007 to 2009 with increases of 11% in 2009, 41% in 2008 and 7% in 2007. The guaranteed median package for an executive director of an AltX company is now at R1,2 million. However, performance bonuses in AltX companies suffered severe strain as a consequence of the economic downturn, and the reduction in performance bonuses paid in aggregate in this sector reflects a decrease of 11% in 2009 and a decrease of 306% in 2008, after a 40% increase in 2007. The median performance bonus is now R328 000, from R1,3 million in 2007.

Long-term incentives
Seegers says 2010 is seeing a renewed focus on the appropriateness of long-term incentives, performance vesting conditions, and which metrics (Total Shareholder Return, Earnings per Share etc.) should be used. “The financial services sector in particular will also be looking at the use of deferred payment mechanisms so that the achievement of long-term strategic targets is rewarded, rather than a focus on the short-term. Other issues that will require intense consideration are cash versus share based awards, the clawback of bonus awards when performance becomes subdued or turns negative, partial deferrals, and smoothed payouts. Another focus area will be that of risk adjustment – with the general principle being that remuneration must be adjusted for all types of risk, including quantitative measures and human judgment.”

Remuneration Committees
Remuneration committees will be increasingly tasked with resolving the many and increasing challenges of executive remuneration. Seegers continues, “They will need to evaluate how well their approach to remuneration is aligned with the requirements set out in the King III Corporate Governance Code. Some sectors, such as financial services, will have to consider global regulations and principles and SA Reserve Bank requirements. Committees will have to manage the mix of variable and fixed pay, determine how to balance risk and reward, and prepare to deal with a negative vote by shareholders on the remuneration policy and its application.”

Seegers says the remuneration committee will need to strike a balance between oversight and governance on the one hand – and the freedom of management to use remuneration as a strategic tool to support enhanced performance on the other. “It will be a careful exercise to link business strategy, performance management and remuneration strategy.”

In awarding pay increases to executives, Seegers cautions the remuneration committee to consider shareholder and public perceptions, as well as economic conditions. “They must be sensitive in deciding how to deal with underwater share grants as well as 2010 bonuses, particularly in sectors where the recession is still being felt – and especially in an economy where the lowest paid workers have annual salaries of around R42 000. This equates to a pay gap in the order of 250-300 times.”
Seegers highlights other major focus areas for remuneration committees. “They will have to re-evaluate the appropriateness of performance conditions and targets in respect of short- and long-term incentive plans, revisit levels of disclosure, and ensure they are prepared for greater shareholder consultation and AGM discussions.”