Executive Salaries in South Africa
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Executive Salaries in South Africa Who should have a say on pay?
Kaylan Massie & Debbie Collier with Ann Crotty
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executive salaries
First published by Jacana Media (Pty) Ltd in 2014 10 Orange Street Sunnyside Auckland Park 2092 South Africa +2711 628 3200 www.jacana.co.za Š Massie, Collier and Crotty, 2014 All rights reserved. ISBN 978-1-4314-1012-5 Also available as an e-book: 978-1-4314-1013-2 d-PDF 978-1-4314-1014-9 ePUB 978-1-4314-1015-6 mobi Cover design by publicide Set in Sabon 10.2/15pt Job no. 002144 See a complete list of Jacana titles at www.jacana.co.za
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To Isobel, whose kicks kept me writing – Kaylan Massie
To Matthew and Christopher, may your future be in a more equal, caring society – Debbie Collier
To RGY – Ann Crotty
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Contents Abbreviations list . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Acknowledgements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Foreword – Pravin Gordhan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii Chapter 1: Executive pay in 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Chapter 2: Global and local perspectives on shareholder value creation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 Chapter 3: Corporate governance and the shareholder say on executive pay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54 Chapter 4: International trends in corporate governance . . . . . . . . . . . . . . . . .83 Chapter 5: Improving the corporate governance say on pay . . . . . . . . . . . 109 Chapter 6: Corporate governance and executive pay in state-owned enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Chapter 7: The role of tax law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 Chapter 8: Providing a say on pay through labour market regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 Conclusion: A way forward. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 Chapter notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 Appendices Appendix 1: Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 Appendix 2: Commentary and notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 Appendix 3: Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262 Table 1 – Packages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263 Table 2 – Packages with gains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266 vii
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Table 3 – Comparison of incentive values. . . . . . . . . . . . . . . . . . . . . . . . . . . 269 Table 4 – Package with gains plus grants. . . . . . . . . . . . . . . . . . . . . . . . . . . . 272 Table 5 – Packages 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274 Table 6 – Correlation between pay and performance . . . . . . . . . . . . 277 Table 7 – Remuneration Committee composition. . . . . . . . . . . . . . . . . 293 Table 8 – Major shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299 Table 9 – Advisory Vote results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301 Appendix 4: Form EEA4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 Appendix 5: Form EEA9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308 Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310 About the authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314 Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316
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Abbreviations list AGM Annual general meeting ASX Australian Stock Exchange BCEA Basic Conditions of Employment Act 75 of 1997 CCMA Commission for Conciliation, Mediation and Arbitration CEE Commission for Employment Equity CEO Chief executive officer CRA Central remuneration authority CRISA Code for Responsible Investing in South Africa CSIR Council for Scientific and Industrial Research Dodd Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 DPE Department of Public Enterprises EBITDA Earnings before interest, taxes, depreciation and amortisation ECC Employment Conditions Commission EEA Employment Equity Act 55 of 1998 Equality Act Promotion of Equality and Prevention of Unfair Discrimination Act 4 of 2000 EU European Union IFRS International Financial Reporting Standards ILO International Labour Organisation IoDSA Institute of Directors Southern Africa ISS Institutional Shareholder Services JSE Johannesburg Stock Exchange King III Code King Code of Governance Principles 2009
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King III Practice Notes King III Remuneration Practice Notes King III Report King Report on Governance for South Africa 2009 LRA Labour Relations Act 66 of 1995 LRS Labour Research Service LSE London Stock Exchange LTI Long-term incentive LTIP Long-term incentive plan NASDAQ National Association of Securities Dealers Automated Quotations NDP National Development Plan: Vision for 2030 NEDLAC National Economic Development and Labour Council NHBRC National Home Builders Registration Council NIACC Net income after cost of capital NYSE New York Stock Exchange OECD Organisation for Economic Co-operation and Development PECS PE Corporate Services PFMA Public Finance Management Act 1 of 1999 PIC Public Investment Corporation (SOC) Ltd PRC Presidential Review Committee PwC PricewaterhouseCoopers RECM Regarding Capital Management ROAT Return on total assets S&P Standard & Poor’s SAA South African Airways SARS South African Revenue Service SEC Securities and Exchange Commission SENS Stock Exchange News Service SOC State-owned company SOE State-owned enterprise STI Short-term incentive TSR Total shareholder return UCT University of Cape Town USB University of Stellenbosch Business School
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Acknowledgements As is often the case when a book gets written, friends and family provide nourishment and support in multiple ways. You know who you are and we thank you for everything you did. We also thank the Institute of Development and Labour Law at the University of Cape Town for providing an institutional home for the project. We are grateful for the assistance of those who guided us through terrain we are less familiar with. While not all are mentioned here, in particular our thanks go to Martin Westcott, Ingrid Woolard, Prof Richard Jooste, Prof Willie Hamman and the numerous consultants from PwC who assisted us with our executive remuneration package queries. Special thanks go to Renée Bonorchis, an accomplished financial journalist and co-author of the 2006 Executive Pay in South Africa: Who Gets What and Why for assisting us with numbers, figures and calculations and for general guidance along the way. Prof Rochelle le Roux, Prof Richard Jooste, Tracy Gutuza and Jacqui Yeats from the Department of Commercial Law at the University of Cape Town kindly agreed to review chapters of the book, and we appreciate their insightful feedback. Of course, any errors in the book remain ours. We also thank those companies studied in this book that cooperated with our attempts to engage with them on their remuneration figures. We are hopeful that a willingness to be open and engage indicates an openness to change and transformation. Last but not least, we would like to thank Carol Broomhall and her team from Jacana for their extreme patience with us, and Brandon Collier-Reed for providing us with an index.
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Foreword – Pravin Gordhan
foreword – pravin gordhan
Foreword – Pravin Gordhan As South Africa we have done much since 1994 to dismantle the structural barriers of the past and extend public services to all South Africans, but there remains much to be done to deal with the triple challenges of unemployment, poverty and inequality. Since the 2008 recession these social and economic fault lines have become global and most societies are engaged in debates and initiatives aimed at overcoming these maladies. Around the world there are markers of discontent as the global financial crisis and the subsequent recession have exposed vulnerabilities and structural imbalances. In many countries income inequality has widened, sparking social mobilisation in societies that have repressed dialogue and political participation for a generation. The pursuit of austerity in developed countries has placed increased pressure on citizens. And given that banks in some of the major developed countries had to be bailed out by taxpayers, the continued payment of bonuses to bankers has effectively resulted in a situation where losses have been socialised and profits privatised. When the global financial crisis hit, South Africa had her own legacy of inadequate infrastructure, widespread poverty and inequality, structural unemployment and a slow pace of transformation. Entrenched in a long history of unbalanced development, these challenges require a clear change of direction and new momentum. So more effective levers of change are required to accelerate development, increase participation by all South Africans in the economy. To achieve an inclusive and equitable economic future, rapid progress is needed on several fronts: the dignity of a job, decent living and working conditions, and a better future for our children.
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Faster economic growth must go hand in hand with job creation and generate the tax revenue that enables government to pursue progressive developmental policies. But development is not just the pursuit of faster growth – it is also about creating a more equitable future. In one sense, there is an ethical argument for more inclusive growth, but there is also a core economic argument. Concentrating all endowments and the returns to such endowments among a smaller cohort of households undermines the growth process as the economy’s productivity levels decline, economic dynamism and entrepreneurship are stifled and the potential for social unrest increases. Against this background, this book is timely and it is a useful contribution not only to the narrow debate about executive remuneration but to the broader discussion that we as a nation should be engaged in about inequality. The authors make a valid point when they point out that the ideal solution to excessive executive remuneration “should come from the actions of a critical mass of ethical and accountable South African executives who, through their words and deeds, demonstrate good leadership, responsibility and fairness”. The authors also point out that companies play a critical role in society, providing not only goods and services to society but also income to employees and investors. Economic growth also depends on what firms do. Given this long shadow that companies cast over the lives of citizens, companies and their executives must therefore be accountable to multiple stakeholders. “Business leaders are responsible for avoiding as far as possible, and for mitigating, the negative social, economic and environmental impacts that their decisions and policies may have. This includes taking responsibility for the impact that their remuneration policies may have on South Africa’s income inequality problem, in the absence of which regulatory intervention should be expected. Business leaders need to demonstrate that they understand the extent of the problem, and that they are committed to the struggle against inequality. As matters currently stand, however, business leaders appear more often to be part of the problem rather than the solution.” What the authors are calling for is a new business culture. Such a
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foreword – pravin gordhan
culture is not incompatible with businesses that are globally competitive and whose success is rooted in the success and challenges that face South Africa. Such a culture will be rooted in empathy and be driven by businesses that go that extra mile to enhance the lives of the poor and contribute to the transformation of our economy and society. And by transformation we mean the creation of opportunities as well as the transfer of skills to those who remain on the fringes of our economy. For the struggle against income inequality to succeed we need business leaders to become Homo empathicus. The National Development Plan reminds us that the fragility of South Africa’s economy lies in the distorted pattern of ownership and economic exclusion created by apartheid policies. Though access to opportunity in South Africa is no longer cast as rigidly along racial lines as it was under apartheid, barriers to progress remain, and for the poor these barriers seem insurmountable. The NDP adds that the effects of decades of racial exclusion remain evident in both employment levels and income differentials, and that the fault lines of these differentials are principally racially defined but also include skill levels, gender and location. Consequently, South Africa has developed into one of the most unequal societies in the world, with very high levels of poverty, carrying all the attendant risks. In addition, the country has failed to reap a demographic dividend by harnessing the potential of a proportionately large cohort of working-age youth. If we are to reduce inequality in South Africa, we must therefore shift the balance of opportunity towards those for whom work, regular income, decent shelter and adequate nutrition are still aspirations. In this rebalancing of access to opportunities, the private sector has a big role to play. Rather than rely on economic rent and endeavouring to accumulate the bulk of the rewards of improved productivity and general economic performance, the private sector should embrace entrepreneurship, innovation and an equitable sharing of the fruits of prosperity. As Nelson Mandela reminded us in his State of the Nation address in 1997: “We can neither heal nor build, if on the one hand, the rich in our society see the poor as hordes of irritants; or if, on the other hand,
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the poor sit back, expecting charity. All of us must take responsibility for the upliftment of our conditions, prepared to give our best for the benefit of all.� I trust that the data, values and issues raised by this book will inspire more concerted action by business and other sectors of society. Pravin Gordhan Minister of Finance Republic of South Africa
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introduction
Introduction This book is about levels of executive pay and income inequality in South Africa. It explores possible inefficiencies and growth-limiting aspects of excessive executive pay and the extent of the gap between the pay of the wealthy executive and that of the working poor. These extremes sustain social dysfunction: almost all of us are affected. In the absence of effective ethical business leadership on the question of remuneration, we support regulatory intervention that provides multiple stakeholders with a say on pay at all levels of a company. Ideally, as the King Code of Governance Principles of 2009 (King III Code) requires, directors and executives should be remunerated fairly and responsibly, and remuneration policies should be guided by the principle of sustainability. This means that companies, as corporate citizens, in their operations and actions, must take into account the impact of their decisions on the social and economic life of the community. Unfortunately, as the analysis we present in this book suggests, in contemporary South African society the market is such that CEOs can engage in rent-seeking behaviour and intervention in the market is necessary to address this. Executive compensation exacerbates inequality and, in many cases, is out of line with the actual economic value contributed to the company. Although we suggest greater intervention in the setting of executive pay, we do so with some trepidation. There can be many negative unintended consequences of well-meaning interventions. For example, there is evidence, globally, that increased disclosure requirements for executive pay can, instead of facilitating restraint, lead to peer comparisons of pay and subsequent pay hikes. We expect there to be some resistance to the idea of increased forms of regulation of executive remuneration and some backlash, particularly from those in the business community who take
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the view that any intervention in the market is bad for the economy and bad for employment equity. However, we believe intervention is indeed necessary and that the appropriate response requires fully engaging the social partners in informed debate and dialogue about the problem and the possible forms of intervention. Business, shareholders, trade unions (which often are shareholders), government and broader civil society should all participate in the debate. The current practice is unsustainable and regulation seems inevitable – the question is one of the substance and form that such regulation should take in order to shift attitudes and change practices. The suggestions we make in this book are just that: suggestions – ways that could help curtail excessive levels of pay and encourage fair and responsible remuneration policies. Ideally, the solution should come from the actions of a critical mass of ethical and accountable South African executives who, through their words and deeds, demonstrate good leadership, responsibility and fairness. In the absence of these ideals, possible regulatory intervention should be discussed among the social partners and implemented in the spirit in which it is intended.
OUR ANALYSIS OF EXECUTIVE PAY IN SOUTH AFRICA In 2006 – in Executive Pay in South Africa: Who Gets What and Why Ann Crotty and Renée Bonorchis published a study of executive pay across 50 of South Africa’s largest and most influential listed companies. The authors revealed that in 2005, on average, the chief executives of these companies received, in guaranteed package, bonus and gains on share options, more than R15 million a year – more than 700 times the minimum wage in certain industries at that time. The authors predicted, with some accuracy, that without government intervention, executive packages would continue to skyrocket. In our analysis presented in this book, we re-examine these chief executive pay packages, with minor changes in the selection of companies analysed. The upshot of our analysis is that very few companies have reined in executive packages.
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introduction
The average cash and benefits package of the 50 CEOs studied here came to almost R13.1 million, and once gains on the vesting and exercise of share incentives is included, this average skyrockets to almost R49 million. This represents a significant increase since 2006, notwithstanding the substitution of four of the original 50 companies with state-owned companies in which executive pay levels show more restraint for the reasons discussed in Chapter 6. We should point out, however, that this study differs from that of 2005 in that our figures include restraint-of-trade and terminationrelated payments, an important component of executive compensation, which accounts for a small portion of the increase. When termination and restraint-of-trade payments are taken out of the equation, the average cash and benefits package of the 50 CEOs came to over R12.3 million and once gains on the vesting and exercise of share incentives is included, this average increases to R48 million. Although we have titled our study Executive Salaries, we are concerned with not only executive salaries but with all forms of executive remuneration or executive pay. What has improved since the 2005 study is the diversity of CEOs and the extent to which some leading organisations appear to have embraced the value of a diverse and representative workplace. In 2005 all the CEOs whose remuneration packages were studied were male. In the current study, seven of the 50 are female and almost a quarter of the CEOs are black. These are welcome developments. Overwhelmingly, however, the huge packages disclosed in this book are being paid to white males. Some additional examples of emerging trends in workplace diversity from the 50 companies we analysed are set out in Chapter 8. There is also some evidence that companies are at least beginning to put income differentials on the table for discussion. Again, these examples are contained in Chapter 8. These developments, too, are to be welcomed, encouraged and monitored for progress. It is important that analysis of executive pay takes place. Companies play a critical role in society, providing not only goods and services to society but also income to employees and investors. Economic growth depends on company activity. Companies have multiple stakeholders within society, and their leaders – the executives whose pay we have
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scrutinised – are accountable to these stakeholders. Business leaders are responsible for avoiding as far as possible, and for mitigating, the negative social, economic and environmental impacts that their decisions and policies may have. This includes taking responsibility for the impact that their remuneration policies may have on South Africa’s income inequality problem, in the absence of which regulatory intervention should be expected. Business leaders need to demonstrate that they understand the extent of the problem, and that they are committed to the struggle against inequality. As matters currently stand, however, business leaders appear more often to be part of the problem rather than the solution. Although our analysis focuses on the pay packages of the CEOs in 50 companies, it is evident from the results of various studies that the problem of excessive executive pay is endemic. In their analysis of the pay packages (including salaries, various benefit payments and bonuses) of 296 executive directors in 83 companies across 14 economic sectors, the Labour Research Service (LRS) in Directors’ Fees 2013 (Covering the 2012 Financial Year) – Double digit increases for a double digit fall in profits) found that ‘[i]n 2012 the average annual remuneration for an executive director was R7 739 970; chief executive officers received on average R11 902 463. A low-wage worker would therefore have to work 15 years, 174 years, and 267 years to earn what an average non-executive director, executive director and CEO respectively were paid in 2012.’ In stark contrast to the millions of rands paid annually to executives, research conducted by the LRS (reported in the LRS, Bargaining Monitor, Vol. 27(179), March 2013) on minimum wages across a range of industries, found a median entry-level wage of R3500 per month in 2012. The study pegs the Electricity, Gas and Water industry at the top end of the range with a median entry-level wage of R7293 per month while agriculture features at the bottom end with a median of R1614 per month. Using data sourced from both recorded wage agreements and the 2012 financial reports of 33 selected JSE-listed companies the LRS calculates a worker/CEO wage gap across various industries, and its results are reflected in the graph below. In its calculation of CEO pay, the LRS includes benefits and short-term incentives received by executives as recorded in the financial reports.
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introduction
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(Source: LRS, Bargaining Monitor, Vol. 27(179), March 2013, p 15) Our analysis on the pay gap within the companies included in our study resonate to a large extent with these figures – as Chapter 1 indicates, on the figures available to us, the Liberty Group CEO to entry-level worker ratio is 128:1, the Netcare ratio is 116:1 and the CEO’s salary alone (excluding benefits, bonuses and incentives) at Anglo Platinum amounts to 76 times the entry-level wage. This ratio almost doubles once you add bonus and benefits, and this still excludes incentives. Such gaps help to sustain the social distance between groups and engender wage dissatisfaction which is a primary reason why workers go on strike in South Africa, so we should not be surprised that workers go to the lengths that they do in their struggle for a decent, living wage. Consider the current strikes in the mining sector against the backdrop of the CEO salaries in this sector. As the analysis in Chapter 1 reveals, many CEOs in the mining sector are among the best-paid executives in the country. Anglo American, AngloGold, Gold Fields, Harmony and Anglo Platinum feature regularly in our analysis of top pay packages. It is widely recognised that the pay gap in South Africa is significant and destructive, and that the model for executive remuneration is not working. PricewaterhouseCoopers (PwC), in their Executive Directors’
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Remuneration Practices and Trends Report (2013), recognises that executive remuneration is under scrutiny and that the current practices cannot continue. PwC suggests an alternative model for executive pay to replace the current complex and ‘dysfunctional’ model. The alternative would result in, among other things, greater certainty for executives and reduced maximum quantum and extended vesting or holding periods. PwC sound the caution that, if regulatory intervention is to be avoided, executives must take action.
INCOME INEQUALITY, EXECUTIVE PAY AND ECONOMIC GROWTH IN THE SOUTH AFRICAN CONTEXT South Africa’s vastly unequal distribution of income perpetuates enormous differences in living standards among households, which divide our society and blight our future. By international standards, our levels of income inequality are extraordinarily high and have in fact increased since the end of apartheid. While the increase in the pay gap largely reflects global trends in many countries, our emergence into the global economy and the pressures of being a global player offer only a partial insight into our pay gap. An Organisation for Economic Co-operation and Development (OECD) Working Paper in 2010 presents research by Professor Murray Leibbrandt and others that shows that between 1993 and 2008 South Africa’s Gini coefficient – a measure of inequality where zero indicates perfect equality and 1 the highest level of inequality – increased from 0.66 to 0.70. The paper demonstrates the importance of fair remuneration practices for addressing income inequality: while income is derived from other sources – remittances, social assistance and capital income – wage income is the dominant component of household income, sitting at around 70% of total income. If, therefore, we are to reduce income inequality it is critical that we break the current cycle of extreme pay gaps. South Africa’s Gini coefficient does not measure up well against that of comparator countries. The OECD Factbook 2011–2012 contains a
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introduction
chapter detailing income inequality in the OECD countries using the Gini coefficient as one of its measures and indicates that the OECD average Gini coefficient is 0.31. The following graph reflects the Gini coefficient in South Africa in contrast to select OECD countries: 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1
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Even the higher-scoring countries among these – Chile, Mexico, Turkey – come nowhere near to South Africa’s shamefully high Gini coefficient of 0.7, or close thereto. The aim of Government’s National Development Plan: Vision for 2030 drafted by the National Planning Commission is to reduce inequality from 0.7 to 0.6 by 2030. It is acknowledged in the National Development Plan that, although this would represent a significant move, high levels of inequality would still persist. In terms of an ‘ideal’ Gini coefficient, economic researchers Cornia and Court have suggested that an ‘efficient inequality range’, which would facilitate economic growth, would typically fall between 0.25 and 0.4. Outside of this range, the resulting (high or low) level of inequality is likely to lead to economic inefficiency. In a situation where there is no income inequality – where everyone gets the same – there is little incentive to work hard or to innovate and productivity will be negatively affected. On the other hand, where income inequality is high, as in South Africa, trust is affected, social cohesion is undermined, and
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many health and social problems are exacerbated. While there was some evidence of a narrowing of the gap in South Africa in the 1980s, research cited by Dr Miriam Altman, in A Review of Labour Markets in South Africa: Wage Trends and Dynamics published in 2005, found that any such narrowing of the gap was stalled. The research indicates that from around the mid-1990s, the gap in relative wages widened for numerous reasons, including a drop in real wages for low-skilled black workers and increased pay for high-skill workers and managers. The oversupply of low-skilled workers, linked to our high unemployment rate (officially around 25% but unofficially much higher), and the undersupply of skilled workers exacerbate matters and an excessive pay gap is not surprising in these circumstances. As a result, remuneration policies, if they are to be part of the solution to excessive income inequality, need to factor in much more than simply supply and demand. If we are to shift the problem anytime soon we need committed and ethical business leaders with Herculean strength and character. As explored in Chapter 2, the current ‘pay-for-performance’ model of executive pay, with excessive rewards following performance, incentivises executives to focus on short-term outcomes in terms of the shareholder value-creation principle, measured by an upward movement in the price of shares. When business success and performance are measured by the price of shares, and, particularly when performance is exorbitantly rewarded, an unhealthy environment – where growth and job creation can stagnate – is more likely to emerge. Executives are incentivised to focus on short-term outcomes and may therefore not invest in long-term projects that would have more potential to create jobs and stimulate economic growth because, in the short term, this would deplete a company’s savings and would undermine profits for distribution to shareholders. This is a matter, discussed in more detail in Chapter 2, that invites further research and reflection in the South African context. It is evident that current remuneration practices are one of many interwoven problems contributing to South Africa’s trenchant inequality. In the circumstances, a well-crafted regulatory approach that promotes
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introduction
restraint and fair remuneration practices can be an important intervention. A change in practice, and a shift in the hearts and minds of the economic elite, is necessary if we are to transform our society and truly address the evils of poverty, unemployment and inequality. Perhaps the first step toward a better, more equal, future is to acknowledge the role the past has played in determining the present. The past may seem like well-trampled ground to some but perhaps there are others who have yet to grasp its importance for understanding the state of our national psyche. David Le Page, a sustainability writer and journalist based in Current remuneration Cape Town, writes that ‘[p]eople are rarely if practices are one of ever “naturally” poor. They are mostly poor many interwoven because they have been shoved aside by the problems contributing powerful: by apartheid, by war, by ruthless to South Africa’s developers and heedless big business.’ Indeed, trenchant inequality. in tracing the historical roots of inequality in South Africa, Professor Francis Wilson documents a long trail of domination (and inequality) starting with the arrival of Europeans at the Cape in the second half of the seventeenth century, which resulted in a series of wars in which Europeans accumulated land and water, resources that were utilised to generate wealth. In the late nineteenth century, minerals were then discovered in the north: first diamonds and then gold, among others, to be exploited primarily by foreigners and settlers who had accumulated, or had access to, the resources to invest in expensive mining operations. African inclusion in mining operations was largely restricted to participation in the migrant labour system: an exploitative system of bringing cheap black labour, mostly males, from rural areas as temporary workers both in the gold-mining industry and later to work as general labourers in urban areas. Migrant labourers were paid less than their white counterparts and were prohibited from settling with their families in the cities and towns that were designated for whites. The system was socially destructive on numerous levels and its impact is still felt today. As Wilson points out, the migrant system ensured that black workers were unable to participate in the typical developments that occur during urbanisation
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in other countries undergoing industrialisation – such as the building of homes and schools and other urban spaces. The impact of these discriminatory, inhumane and racially skewed practices of the past still haunt us today. For Francis Wilson and Mamphela Ramphele, ‘the crux is that due precisely to the nature and extent of South Africa’s migrant labour system, the very processes that were generating wealth in the country were simultaneously generating poverty’.1 Like the migrant labour system, itself part of the very foundation for current remuneration practices, executive pay stands to be judged as a process for generating wealth in the country while simultaneously generating poverty. Added to the migrant labour system was the National Party’s impoverished educational policy of ‘Bantu Education’, which ensured the delivery of significantly inferior schooling to the black population and successfully undermined the development of human capital for a majority of the population. Settler communities were therefore the first to benefit from affirmative action policies in the country. As Wilson concludes, ‘[d]ifferential opportunities for blacks and whites exerted by means of a legal and social colour bar combined with blatant discrimination in human capital investment for 100 years and more has built a racial bias in the underlying Executive pay stands to pattern of income distribution that cannot be be judged as a process simply rubbed out overnight’.2 for generating wealth Indeed, many studies confirm South Africa’s in the country while notoriously unequal distribution of income. A simultaneously recent study by the World Bank lists several generating poverty. factors that contribute to the ongoing problem, including the education levels of household heads and the location of workers – having been forced to settle on the outskirts of cities, black workers struggle to access decent workplaces. These are matters government takes seriously and a blueprint for action has been provided in the National Development Plan: Vision for 2030. Companies, in turn, should play their part by taking the wage gap more seriously. This is a significant area in which inroads into inequality can be made through the actions of business.
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introduction
JUST HOW BIG IS THE PAY GAP IN SOUTH AFRICA? While the pay gap – being the difference between CEO pay and the pay of a low-level worker in an organisation – may differ between organisations and between industry sectors, it is possible to calculate broad market trends from available data. Differences in results will arise however depending on the methodology used. Primarily differences are caused by the choice of the components of executive pay included in the calculation. As we indicate in Chapter 1, an executive remuneration package typically consists of three elements: (1) a guaranteed package (salary, benefits and allowances), and variable pay – being (2) short-term incentives (STIs) and (3) long-term incentives (LTIs). A pay gap calculated on the basis of guaranteed pay only will obviously reflect a lesser differential than a gap calculated on the basis of all remuneration (including base pay and shortterm incentives) received by the executive. A company’s obligation to report on income differentials contained in the Employment Equity Act (EEA), and discussed in detail in Chapter 8, includes cash payments, benefits and allowances but excludes share incentive schemes and discretionary payments not related to performance. In our view, analysing the pay gap on this basis obscures the extent of excessive executive remuneration and is a matter that should receive consideration in further deliberations on measures to rein in executive pay. Among the organisations that undertake wage-gap analysis are the Labour Research Service (LRS), a non-profit organisation whose research results, as discussed above, indicate wage gaps of between 1:136 and 1:393, and PE Corporate Services (PECS), who research is discussed below. Both produce useful analysis. Although the PECS research limits its analysis largely to the fixed or guaranteed remunerations levels within an organisation, its results nonetheless reveal significant pay gaps. In a recent article titled True or False: The Pay Gap in South Africa is out of line with the rest of the world, Martin Westcott of PECS differentiates between large, intermediate and small/ medium manufacturing organisations, depending on their turnover and number of employees, and compares the typical CEO’s guaranteed package
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against the typical basic skill-level package. The results are as follows: • large organisation (over R1 billion turnover / 5000+ employees): pay differential ratio of 1:47; • intermediate organisation (R250–R500 million turnover / 2500+ employees): pay differential ratio of 1:28; and • small/medium organisation (up to R100 million turnover / up to 500 employees): pay differential ratio of 1:21. The income differentials reflected in the pay-gap analysis in the manufacturing sector are less than the differentials of the overall market: for example, PECS research indicates that in 2012 the income differential between the CEO and the lowest-level worker of an intermediate-sized company was a ratio of 1:52. The graph on page xxix, prepared by PECS on the basis of the organisations’ database statistics across all sectors of the economy, neatly illustrates movement in pay differentials in the overall market since 1994. The graph, based only on fixed or guaranteed remuneration, reflects significant growth between 1994 and 2008 and some dips and levelling off thereafter. PwC in Executive Directors’ Remuneration Practices and Trends Report (2013), calculating from the CEO’s total guaranteed package and the lowest-paid income group, concludes that the pay-gap ratio in JSE-listed entities is 1:53 and, using the PwC REMchannel® database, the ratio is 1:45. In addition, PwC includes the ratio of SA Financial Services (1:69) and China (1:20) as a comparative. PwC also reports on the Japanese success story and indicates that the Nikkei Business Daily has reported that executives make only 4.8 times more than the average worker. Shumane and Taal of the Labour Research Service (LRS) present their most recent research on the wage gap in a document titled Directors’ Fees 2013 (Covering the 2012 Financial Year) – double digit increases for a double digit fall in profits. As indicated above, the LRS surveyed the directors’ fees (for 296 directors) paid in 83 companies across 14 economic sectors in the 2011/2012 financial year. In terms of the companies surveyed, the LRS noted a 24% drop in company profits, while the average annual
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introduction
CEO of an intermediate-sized company vs lowest-level (A-band) worker 70 57 57 58 57
60
Ratio
50 40
37
45 47 47 43 44 40 39 40
49 48
55
55
52 52 52
56
30 20 10
2013
2012
2011
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
0
Year
(Source: PE Corporate Services) salary (which excludes bonuses) of the CEO rose by 10%; that of nonexecutive directors by 12%; and the average executive director salary rose by 9%. During the same period, the increase of the average low-wage worker (at an annual income of R44 496) was 8%. When bonuses are added to the CEO and executive remuneration package, the LRS research indicates a slight, but encouraging, fall on average of 2–3%. This will have little impact on the pay gap they reveal of around 1:267. A suitable pay gap in the South African context has yet to be determined. Although the Employment Equity Act (EEA) mandates the Employment Conditions Commission (ECC) to research and investigate norms and benchmarks for determining when income differentials are disproportionate, to date the ECC has been unable to obtain the data analysis on income differential reporting in order to construct a series of wage differentials (by sector) that would assist in establishing benchmarks and norms. We make some suggestions in this regard in later chapters, including the possibility of bringing the question of income differentials within the purview of the National Economic Development and Labour Council (NEDLAC). NEDLAC provides a platform, at national level, for the social partners to bring their respective interests to the bargaining xxix
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table. Social dialogue and ethical business leaders are critical components in the struggle against excessive executive remuneration and income inequality. In determining appropriate income differentials, South Africa’s unique social and economic dynamics – levels of inequality, skills shortage and unemployment, for example – need to be factored in. Developments abroad are nonetheless informative and worth considering, even if possibly of somewhat limited value. Examples include: the ‘1:12 initiative’ proposed (although unsuccessfully) in Switzerland in November 2013; the proposed Income Equity Act of 2013 in the USA, which seeks to deny employers a tax deduction for payments of any compensation to an employee that exceeds 25 times the lowest compensation of any other employee or US$500,000; and, as reported on by Le Page, the limitation in Venezuela that no public official can earn more than 12 times the minimum wage; the rule imposed (100 years ago) by investment banker JP Morgan that his pay should not exceed 20 times the lowest wage; and the 1:19 maximum pay ratio of Whole Foods, an American supermarket chain. Of the 50 companies we surveyed, a handful have reported on income differentials and the steps taken toward reducing the gap. Such reporting is to be encouraged and monitored for progress. More detail in this regard is provided in Chapter 8.
HOW DO THE PAY PACKAGES OF SOUTH AFRICAN EXECUTIVES COMPARE GLOBALLY? Perhaps a less well-known fact is that, even by global standards, South African executives are remunerated at extraordinarily generous levels. The justification for this is likely to be that, unless payment is at internationally competitive rates, executive talent will be lost to the international market. However, as the PECS study discussed below reveals, executive pay levels in South Africa appear to be in excess of, and indeed out of kilter with, internationally competitive rates.
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introduction
That executives are generously remunerated in comparison with their global peers is confirmed by an Index of Purchasing Power constructed by PECS to measure and compare the buying power of executive pay across the numerous countries included in the study. To construct the index, PECS conducts an annual survey of remuneration (including base pay and short-term incentives) received by executives in these countries and determines the net disposable income available to an By global standards, executive. PECS then measures the relative South African executives buying power of the disposable income within are remunerated each country studied, using a net wealth at extraordinarily index. In terms of their analysis, South African generous levels. executives ranked the highest of the countries compared between 2009 and 2011. In 2012, South African executives ranked second, only a small margin behind the USA. The 2012 results are illustrated in the following chart: Relative wealth – How South African executives rank globally
Index of Purchasing Power
120 104
100
100
89 80
84
78
74
75
69
67
60 49
48
47
50
72 55 48
40 20
a
aw Na i m ib ia Ni ge ria Za m bi Zi a m ba bw Bo e t M swa oç na am bi qu e
al M
A.
ny
Ke
K.
S. U.
U.
y
ds la n
th er
ce
an
m
Ne
Fr an
er
G
lia
um
ric
lg i
Be
st
Af
Au
ut h So
ra
a
0
(Source: PE Corporate Services)
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While the assumption is that South African executives will leave the country in droves if their remuneration packages show shrinkage, recent research by PwC seems to suggest otherwise. PwC conducted a Psychology of Incentives (2012) study of how executives from 43 countries view pay and incentivised reward. Interestingly, the study found that: • the complexity of the ‘pay-for-performance’ First prize would models were so difficult to understand – and to compare – that these models had a be resolution of the negative effect as an incentive for workers; problem by ethical and that executives acting as • executives are motivated by factors other leaders, not only within than money, such as recognition and their organisations but personal satisfaction.
also within the societies of which they are part.
The current models for executive remuneration appear not to be working well for any of the stakeholders, including shareholders and even executives themselves. The question is what to do about it; and who needs to do something about it. First prize would be resolution of the problem by ethical executives acting as leaders, not only within their organisations but also within the societies of which they are part. In the absence of strong leadership, however, regulatory intervention is to be expected and may be necessary if we are to begin to address the harm caused by inequality.
WHY IS INEQUALITY – A LARGE PAY GAP – BAD FOR US, OR WHY IS GREATER EQUALITY GOOD FOR US? Many health and social problems are linked to high rates of inequality – highly unequal societies have been proven to be dysfunctional societies. Over the past decade or so, a significant body of peer-reviewed studies have emerged, which are comprehensively analysed by Wilkinson and Pickett in The Spirit Level: Why Equality is Better for Everyone (2009, 2010). Wilkinson and Pickett provide many examples of studies that demonstrate the link between high-income inequality and:
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• • • • • • • • •
high rates of depression and anxiety; low levels of trust – both interpersonal trust and trust of government; widespread reliance on drugs and alcohol; high levels of crime and violence; decreased life expectancy and increased infant mortality; high levels of obesity and mental illness; low levels of social mobility; lower scores in Maths and reading; and higher levels of personal and institutional debt.
In addition, measures of corruption suggest that greater levels of inequality are likely to increase corruption in government and society more generally. More specifically, Wilkinson and Pickett explain: ‘Across whole populations, rates of mental illness are five times higher in the most unequal compared to the least unequal societies. Similarly, in more unequal societies people are five times as likely to be imprisoned, six times as likely to be clinically obese, and murder rates may be many times higher. The reason why these differences are so big is, quite simply, because the effects of inequality are not confined just to the least well-off: instead they affect the vast majority of the population.’ Inequality divides us as a society, and perpetuates a divisive racial cleavage, exposing us to an increased likelihood of being affected by the malaises of mental illness, imprisonment, criminal behaviour and obesity, among others. It is increasingly recognised too that inequality impedes economic growth. Various studies in this regard are documented in the 21st Century Pay Solutions Group study conducted in 2012 for the Presidential Review Committee on State-Owned Enterprises. The remuneration policies of our companies play a significant role in sustaining the current untenable levels of inequality. The purpose of this book is to highlight current remuneration practices, particularly in determining executive pay, which contribute toward the problem of income inequality, and to suggest ways to facilitate a greater stakeholder say on pay with a view to reining in executive remuneration for the greater good of society.
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OVERVIEW In Chapter 1 we examine the various elements of remuneration packages paid to the 50 executives studied in this book. We analyse the top 15 executives and the various forms of pay they receive. For example, the highest cash and benefits packages paid to executives during 2012 are disclosed, as are the highest amounts paid once the gains made by the executive during the year on the vesting and exercise of share incentives is included. Unique for a study of this kind in South Africa, we also examine the maximum value of share incentives granted during the year, disclosing the top 15 long-term incentive packages granted in 2012. In addition, we compare the packages of executives in state-owned enterprises (SOEs) to those of other JSE-listed companies, and we examine the extent of the increase in cash and benefits packages paid between 2005 and 2012 and the extent of wage differentials that exist within these companies. In Chapter 2 we look abroad to the impact that current executive remuneration structures have had on the global economy. The issue of whether current remuneration structures provide perverse incentives to executives to engage in value-destructing behaviour is examined. This chapter looks at the often-ignored issue of share buy-backs, a practice in which companies buy back their own shares from shareholders in order to increase the share price, which is often done at a time when executives are selling their own shares on the market. The South African experience with share buy-backs is discussed, as are solutions to these problems. Chapter 3 studies the current corporate governance landscape in South Africa related to executive remuneration, including the corporate law and the 2009 King Code of Governance Principles. It looks at what measures are in place to align the interests of boards, executives and shareholders when it comes to the issue of executive pay. This chapter discusses the duties of directors to act in the best interests of the corporation, the amount and type of disclosure on remuneration required by the law, the availability and effectiveness of the shareholders’ say on pay through the non-binding shareholder advisory vote on a company’s remuneration policy and various court actions that could be used by shareholders in
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order to enforce these corporate governance standards. In Chapter 4, we once again survey the international landscape, this time to determine what corporate governance practices exist abroad that could provide guidance for reforming South Africa’s corporate governance standards. We discuss trends from the United States, the European Union, the United Kingdom, Australia and Switzerland related to the independence and role of remuneration committees, remuneration disclosure standards and the shareholders’ say on pay. Chapter 5 makes suggestions on how to improve South Africa’s corporate governance standards of executive remuneration based on lessons that can be learned from the international regulatory experience. We suggest amendments to South Africa’s corporate governance legislation and standards that would improve disclosure about pay by companies in their annual reports, boost the independence and role of remuneration committees and strengthen shareholders’ say on pay. Chapter 6 looks at the varied remuneration practices in SOEs and examines the wide variety of legislation, regulation and government policy related to executive remuneration in SOEs. It suggests areas in which government policy could be reformed and made more coherent in order to ensure that executives of SOEs are remunerated in a way that is consistent across SOEs and takes into account the important role that SOEs have in transforming South African society. In Chapter 7, we discuss the effect of South African tax regulation on executive remuneration. The role of tax law as a tool to redistribute excessive portions of executive pay is examined, as is the potential for tax law to reshape the incentives of boards and executives when pay is awarded. We explore tax law solutions to the executive pay problem from the US, UK and the Netherlands. This chapter addresses the potential that any reform to tax regulation may have the unintended consequence of increasing levels of executive pay by causing companies to shift from one form of pay to one that is more lucrative and results in a lower tax burden. The chapter concludes by making suggestions for reforming the South African tax landscape with a goal to reducing after-tax income disparity in this country and avoiding these unintended consequences. Chapter 8 explores the current aspects of South Africa’s labour law
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that deal with income inequality and excessive executive pay, including the principle of equal pay for work of equal value, the company’s obligation to report on income differentials and its obligation to address income differentials that perpetuate historic discrimination. It looks at avenues that exist to provide employees with a say on pay, including collective bargaining, and makes suggestions on how to strengthen the say on pay given to employees at all levels of the company. The final chapter concludes with a synopsis of possible forms of regulatory interventions that, in the absence of strong ethical business leadership, might move our society a step closer toward the goal of a fairer distribution of income.
CONCLUSION South Africa’s remuneration practices, unfortunately, share similarities with practices in the USA and the UK, as opposed to continental Europe and Japan where greater restraint is demonstrated. A common explanation for this divergence of approach is that the remuneration practices in English-speaking countries hinge more closely on free-market principles, which opens up the space for abuse as executives have more freedom to determine their own remuneration. However, although we draw on comparative research, this book is primarily about remuneration practices in South Africa. While excessive executive remuneration is a problem not only in South Africa – and the global context cannot be ignored – our context is unique and our solutions should be home-grown. The common response from business – that executives must be paid internationally comparable salaries or they will leave – is possibly a hollow threat and its veracity should be tested. Uncomfortable questions should be asked of our executives to ascertain the extent of their commitment to truly address the economic and social problems that pervade our society. Companies and their executives are partners in a social compact involving multiple stakeholders. As contracting partners, we should expect, and indeed demand, ethical leadership from our executives and should not settle for anything less than the commitment of our business leaders to
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sustainable development and a better future. While there is at least some indication that income inequality and disproportionate income differentials are becoming more prominent factors when determining pay, and there is some evidence of restraint in the award of executive pay increases, any optimism in this regard should be tempered by caution. The inroads are still slight and the momentum to increase executive pay, without significant redress in lower level pay, has not yet been proven to be broken.
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