While shareholders and other stakeholders place mounting pressure on regulators to curb the perceived high levels of executive pay and their incentive arrangements, executives in the corporate sector are also under enormous pressure to adapt to the changing business environment particularly with the advent of digitisation of the business world.
Gerald Seegers, Head of People and Organisation for PwC Africa, says: “Executive pay has come under intense scrutiny around the world, with many critics arguing for more stringent regulations citing the weak link between pay and performance, and the need for more transparency in the pay determination process.” In South Africa, there is a strong movement, particularly in the wake of the King IV report, pushing for listed companies to adopt better remuneration reporting and shareholder engagement practices, and for all organisations to implement fair and responsible remuneration policies.
PwC’s ninth edition of ‘Executive Directors’ Remuneration and Practices’ report released today shows that executive pay continues to come under intense scrutiny from all angles, with mounting calls from institutional investors to reform executive remuneration. Despite numerous initiatives been taken around transparency and better reporting, the gap between executive pay and the pay of the average employee continues to widen. “It is almost certain that the current model of executive pay will be revisited,” Seegers adds.
Regulation on executive pay
Some countries have sought to regulate executive remuneration for companies falling within specific sectors such as financial services, whereas other elements have addressed all publicly-listed companies. Some jurisdictions place specific requirements on the composition and disclosure of an executive’s remuneration package. For example, South Africa and the UK have sought to align the remuneration packages of executives in insurance companies to each company’s risk horizon.
Say on pay
‘Say on pay’ is gaining momentum in the wake of increasing demands for South Africa to move towards a binding vote on remuneration. Worldwide, ‘say on pay’ is becoming the norm for shareholders to express their views on proxy filings and remuneration reports that disclose compensation paid to directors. In some countries we are seeing shareholders and other institutional stakeholders objecting to rewarding directors for failure to perform.
In the UK, the Government is considering a range of options covering new voting powers for shareholders, better disclosure, simplified payment plans, and employee and consumer representation on company boards. The PwC report looks at the trends why institutional investors globally have voted “no” or against these policies and practices.
CEO succession in a digital world
The scope and scale of digitisation has grown immensely disrupting almost every sector in business. It remains to be seen how, and the extent to which, digitisation will disrupt the composition of traditional financial performance metrics that drive the behaviours and competencies of CEOs; as well as its impact on short-term and long-term incentives. With time, we expect that CEOs will also be selected and measured on their ability to navigate their companies through a rapidly-changing global technological environment; and this will include developing appropriate incentivisation and retention strategies for their key talent pool.
The ethics of pay
There is consensus that inequality, unemployment and poverty should be national priorities although the means of addressing these challenges remains under debate. The report provides an update on pay fairness as a means of addressing these issues. Our annual analysis of pay statistics indicates that the Gini coefficient of the employed has remained steady at 0.43, but there is evidence of companies beginning to attend to the plight of the most poorly paid employees.
The upper end of the pay ratio has decreased substantially from a range of 12.8 to 61.8, compared to a comparable range of 12.7 to 64.8 in 2016.
Profile of an executive director
As at 28 April 2017 there were 1 174 (2015: 1 179) executive directors appointed to 360 active JSE-listed companies. Included in this total were 355 CEOs (2015: 338), 310 CFOs (2015: 304) and 509 executive directors (2015: 537). The number of executive directors has levelled out over the past few years. The age profile reflects that there is a slight downward trend, with a median age of 52 and an average slightly higher at 53. Board tenure for executive directors serving on the JSE remains relatively short at 4.8 years as reflected for reporting periods 1994 to 2016.
Gender inclusion in the boardroom has become a business concern. Although women constitute 40% of the global workforce, only 5% of global CEO positions are held by women. This falls short of the desired target of 50% to achieve gender equality. In South Africa there is only one female CEO in the JSE top 40 listed companies.
Remuneration trends in South Africa: JSE-listed companies
The report reviews the total guaranteed package (TGP) for executives paid during the reporting period and includes an overview of short-term incentives paid to executives. The average inflation in South Africa for the 2016 reporting period was 6.6% (2015: 6.2%). Over this period, the average increase paid to junior workers was 16% while for executives this was 5.7%. The median executive pay for all JSE executives was R3.906m (2015: R3.694m). For the first time we review the executive pay of the JSE top-10 companies which account for 60% of the JSE’s market cap. Since the sample is insufficient to calculate quartiles, only the average has been used. The average executive pay for CEOs is R24.6m. For CFOs the average is R13.8m and for EDs R7.7m.
The executive pay for each sector is also analysed. There are a total of 53 companies included in the basic resources sector, with only eight still listed among the large-cap companies on the JSE. The impact of weak global demand for raw materials has negatively affected the basic resources sector since 2008 and as a result there are modest increases in executives’ remuneration across this sector. The median TGP for CEOs of large-cap basic resource companies is R23m and the median TGP for executive directors is R16.3m.
The recent economic uncertainty has also had a significant impact on financial services companies, which have increasingly turned to cost reduction and expanding their business beyond South Africa in order to boost returns. These initiatives have had mixed results and the performance of executive directors is being observed by shareholders.
The median TGP for the CEOs of large-cap companies in the financial services sector showed a modest increase of 6.3% (R7.4m). The median TGP for the executive directors in this sector showed an above-inflationary increase of 7% (R4.3m).
The median TGP for large-cap CEOs at industrial organisations showed a marginal increase of 3.3% (R15.2m). Similarly the median TGP for the CEOs of large-cap service companies showed an increase of 4.8% (R8.1m).
Remuneration trends in FTSE 100 companies and other African countries
All listed companies in the UK, except for small businesses that are exempt, are required to disclose an aggregate remuneration for each director in their remuneration reports with effect from 1 January 2016. A key aspect thereof is that it includes a value for share-based payments. The report however, is limited to what is considered to be TGP which excludes all variable pay. The median TGP of all executives serving on the FTSE 100 converted to US dollars was US 1 060m.
The report also includes 412 companies listed across 7 sub-Saharan Africa (SSA) stock exchanges: Botswana, Ghana, Kenya, Namibia, Nigeria, Tanzania, and Uganda. The report reviews the median remuneration paid to CEOs, CFOs and EDs of these countries. By contrast to their FTSE 100 peers, the median remuneration paid to all executives across these 7 African countries is US 241k.
“In conclusion, executives face a number of challenges navigating organisations in today’s business environment while at the same time managing employees’ demands that their workplace have a clear meaning and purpose, and fit with their values. Going forward, there will be more focus on the financial wellness of junior workers which should address the issue of inequality, unemployment and poverty,” Seegers comments.