Executive remuneration closely scrutinised – PwC

The first edition of the PricewaterhouseCoopers’ (PwC) Executive Directors Best Practice and Remuneration Report focuses on executive directors of companies listed on the Johannesburg Stock Exchange (JSE) and includes companies with dual listings on the JSE and other bourses.

Gerald Seegers, director of Human Resource Services for PwC says, “This report draws on best practice as proposed in the third King Report on Corporate Governance (King III), as well as the various guidelines and codes issued by Regulators around the world over the past few weeks.”

The report clearly states that it is imperative that the executive’s contribution and performance are monitored within the scope of their authority. This is especially relevant in a downturn where economic factors may be out of the executive’s control, but the consequences will undoubtedly effect decisions made. Key performance indicators (KPI’s) should be considered in the broader scope of remuneration, especially when non-financial KPIs are included in performance measurement.

Scrutiny of executive remuneration is now greater than ever before as a result of the economic downturn combined with public anger over the role that remuneration is perceived to have played in the collapse of the financial markets. It is clear that change is required because the levels of trust between shareholders and remuneration committees are lower than ideal.

Companies should remunerate fairly and responsibly. Remuneration policies executed should be focused on creating value for the company over the long-term, aligned with the company strategy and reviewed regularly. Remuneration for executive directors is the responsibility of the board of directors and does not require shareholder approval.

However, all aspects of remuneration paid to executive directors are required to be disclosed in the annual report of the company. Research clearly indicates that total cost to company is now more fully disclosed on than previously. Seegers says, “Companies are required to provide full disclosure of directors’ remuneration on an individual basis, giving details of pay bonus, share-based payments, restraint payments and all other benefits.”

Seegers continues, “Human Resources (HR) professionals know that performance management is vital to the success of business operations. The current global climate is riddled with variables including technological changes, economic slumps and a shift in worker demographics. This amplifies the role of performance management in both importance and complexity.”

The report examines the main elements of remuneration and uses the latest data from medium and large cap companies on the JSE over the past five years to explore trends in design and value as paid to executive directors. The trend for 2009 is difficult to predict since the effects of the economic downturn have not gained sufficient traction to reflect on future remuneration levels. The historic basis will probably not be a fair basis to use in forecasting future trends.

There has been much finger pointing on both sides of the Atlantic aimed at the financial services sector concerning the level of remuneration, especially performance bonuses. In substantial parts of the banking industry variable compensation has a short-term focus and is not adjusted for risk. The economic tsunami hit the financial services industry the hardest and there is powerful circumstantial evidence to demonstrate that control systems failed to deal with risks created by inappropriate incentives.

With this in mind, it is interesting to note that the greater bonus outrage may very well be that the US Federal Government pays bonuses to its employees too. In 2009 it plans to pay around $1.6 billion in bonuses despite running more than $1 trillion in the red.

In conclusion Seegers says, “Being a member of a Remuneration Committee is and should be a tough job. There is a need for committees to be more challenging and more discreet whilst managing the board to avoid division over executive pay. Robust governance processes must be in operation throughout the organisation, with clear oversight responsibilities.”

Prior to the global economic slump the role of the Remuneration Committee has been to provide oversight over the executive remuneration, with reporting accountability to shareholders through the Remuneration report. This remit has typically involved oversight over broader remuneration policy, but which in practice, rarely reaches below executive level.

Depth of business expertise is more likely to be required of non-executives sitting on the committee dealing explicitly with companywide remuneration arrangements. The committee may also want to consider including a greater involvement from control functions such as risk and finance.