South African companies can expect more scrutiny of executive remuneration
South Africa’s companies are being forced to reconsider what they remunerate their executives in the wake of new regulation, increasing shareholder activism and other stakeholder concerns, according to a report issued by Professional Services Firm PwC.
Gerald Seegers, Human Resources Services director of PwC Southern Africa says: “In the past year we have seen shareholders and institutional investors becoming more vocal than ever regarding perceived excessive payments made to executive directors.
“It remains a tough act to balance the interest of all stakeholders including shareholders, the wider base of employees, the government, the public and especially the expectations of executives directing companies on a daily business to remain profitable, increase profitability or return to profitability.”
PwC’s fourth edition of the Executive directors – Practices and remuneration trends report South Africa 2012, analyses the general quartiles of total remuneration, the elements which make up remuneration as well as whether regulation and legislation, similar to what is presently proposed in the UK and Australia, is the solution in South Africa. The report analyses all 373 listed companies on the JSE, based on information taken from their annual reports as at 30 April 2012.
Total remuneration levels for executive directors increased significantly over the past 12 months and varied considerably from industry to industry, and across large, medium and small-cap companies. Most of the significant increases were in the form of actual short-term incentives. “This is possibly a product of the recent economic uncertainty and companies seeking to retain what they perceive to be their top talent, or bidding to obtain talent from elsewhere in the market,” Seegers says.
Total guaranteed package increases
The general trend for total guaranteed package increases in South Africa for employees for the 12-month period prior to March 2012 was 6.7% to 7.2% on average. In comparison last year’s average total guaranteed package increase for the 12-month period prior to March 2011, ranged between 7.6% and 8%. “It is evident that companies are approaching total guaranteed packages with greater caution. This is understandable when considering the greater reward and economic landscape both nationally and internationally,” says Seegers.
The median increases for executive directors of large, medium and small cap companies listed on the JSE was between 6% to 8%. In those instances where increases exceeded 8% it tended to be as a result of a change in leadership.
In the light of the global economic climate, coupled with increased shareholder activism and public scrutiny, total guarantee pay increases for 2013 in South Africa should not exceed inflation. Anticipated increases will largely depend on whether markets on the whole increase and any increases in remuneration not aligned to share price performance are likely to meet strong resistance from shareholders.
“It is anticipated that companies will continue to focus on variable pay as the differentiating element to either reward performance or attract critical skills.”
The large-cap companies in the services industry showed a marginal decrease in total guarantee pay for CFOs, while increases for the positions of CEO and executive directors ranged between 10.7% and 12.2%, rising to R6.18 million and R2.72 million, respectively.
Large-cap companies in the financial services sectors had increased levels of total guaranteed pay for the CEO, CFO and executive directors. CEO and executive director increases appeared to be relatively healthy compared to general market increases at 9.6% and 12.8%, rising to R5.93 million and R3.18 million. The median total guarantee pay for the position of CFO had a marginal increase of 1% to R3.61 million.
The large-cap group within the resources sector indicated the most subdued movements from last year with increases in line with general market trends. In the case of the CEO and executive directors, the total guarantee pay had increased by levels that would be perceived to be below market levels at 6.1% and 4.1% respectively. Furthermore, the position of CFO experienced a decline of 3.4%.
The AltX group of companies came under considerable pressure as a result of the economic climate, with a significant number of entities delisting. Despite difficult trading conditions, there was an upward trend in guaranteed pay. The median total guaranteed pay for the position of CEO has risen by 8.9% to R1.5 million, the median total guaranteed pay for the position of CFO has risen by 12.4% to R1.04 million, and the pay for executive directors has increased by 13.5% to R1.18 million.
Short and long-term incentives
The actual payout levels for short-term incentives for the 2012 reporting period rose significantly from the previous levels, reflecting a combination of higher on-target percentages for larger companies as well as higher guaranteed pay levels for large cap companies. The large-cap CEOs received a median short term incentive, which at R8.25 million is more than double that of the medium cap CEO (R3,72), while the small-cap CEO received a payout that is one eighth the size of the large-cap CEO at R981,000.
In South Africa, trends around long-term incentive plans continue to revolve around addressing retention risks associated with shareholder activism and the effect of the new Companies Act, 2008 regarding the way in which companies use share plans.
Just under half (46%) of all plans used by the large-cap JSE listed companies are full share-type plans followed by option type plans (36%). The latter showed a drop from 40% as reported in the 2011 study.
Profile of an executive director
The report also discloses that as of 30 April there were 1,151 executive directors of JSE-listed companies. This is an increase of five executive directors over the 2011 figure of 1,146. Interestingly the number of executive directors increased in all of the industry groups, except in the AltX group of companies where the number of executive directors declined by 7% over the most recent year. The most noticeable increase was a 5.4% rise in the services industry group, followed by a 4.1% increase in the financial services industry group.
The age of a South African executive director is relatively young, compared to both global norms and the mandatory retirement age. The survey shows that while the median age has increased by a year from 49 to 50 years, the median is noticeably lower than the retirement age of 63 years.
“The lower age can largely be attributed to the skills crisis experienced in South Africa,” says Seegers.
Transformation remains a thorny issue and is particularly evident when reviewing the profile of the executive director. Although transformation is taking place at board level, it is moving somewhat slower than anticipated. The study shows that African, Coloured and Indian representation has increased from 10% to 16% in the recent year. The major driver of this shift has been the increase in the financial services industry group and the 8% increase in the basic resources industry group.
The percentage of women operating in executive roles has increased considerably from 4.2% in 2011 to 8% this year and for the first time we review the female representation on boards globally.
Companies are also grappling with the issue as to which individuals should be included under the realm of ‘prescribed officers’ as provided by the Companies Act. The ‘prescribed officer’ is drafted widely to include all individuals involved in any material aspect of the company or any part thereof. This can be any person that has general executive authority over the company, or a significant portion thereof, concerning the financial affairs, or day-to-day operational responsibility.
The King III Report on Corporate Governance was also recently amended to provide that prescribed officers, and no longer the top three earning employees, who are not executive directors, should be disclosed on an individual basis.
The current 2012 reporting period was the first year for disclosure of prescribed officers’ remuneration information. However, data relating the remuneration of prescribed officers is limited at this stage and there is not sufficient information available to carry out a detailed quartile analysis.
Corporate governance developments
Although current developments in corporate governance indicate that remuneration governance will remain non-mandatory, apart from specific provisions of the new Companies Act, 2008, it will be interesting to see how the economic climate, public pressure and the political environment affect this. “It may well mean that South Africa could move to a more regulated environment, similar to the sentiments expressed in the UK and the earlier proposals by representatives of the European Union and Australian government,” says Seegers. “Will bonus capping in South Africa become a reality? Whilst not appropriate, if the negative shareholder sentiment continues we may see renewed pressure for radical changes,” say Seegers.