Corporate governance and regulation changing executive remuneration trends
As South Africa slowly emerges from the recession, a wave of improvements will uplift a number of industries and add momentum to already-buoyant remuneration levels. However, with corporate governance climbing up the boardroom agenda, companies are expected to increasingly be scrutinised and challenged when they pay executive directors, according to PwC.
“Directors’ remuneration has constantly made headlines, as remuneration paid to employees differs quite largely to that of the executive directors of a company. Now that corporate governance, King III and more recently the introduction of the new Companies Act, has infused boardrooms across South Africa, executive remuneration has not been spared,” says Gerald Seegers, the Human Resources Services director of PwC Southern Africa.
In PwC’s third edition of the Executive directors’ remuneration – practices and trends report, the firm reviews the remuneration levels of executive directors, provides a regulatory update and for the first time reviews the profile of South African executive directors.
Remuneration levels seen in the market depend on both the industry that company operates in and the size of the company itself. For example, a majority of mid to large-cap companies listed on the JSE have seen increases in both short-term incentives and the total guaranteed packages, while small-cap companies paint a different picture.
“In some industries, some small-cap companies may have experienced remuneration growth levels while others saw declines, which collectively have led to a decrease at the median level in both total guaranteed packages and short-term incentives, falling 6.7% and 29.5% respectively.
However, large-cap companies total guaranteed packages increased 23.3% at the median level, while short-term incentives was 57.5% higher,” adds Seegers.
In South Africa, the executive pay gap has been quoted as being 300 times more than another employee. Seegers cites data provided by REMchannelR database for the national all industries sector shows, which compares the highest level for base salary and total guaranteed package at each quartile with the lowest level at that quartile: “It shows that the lower quartile total guaranteed package was at 95.11 times compared to the upper quartile total guaranteed package of 153.41 times.”
“There is increasing pressure on companies to disclose the executive pay gap because there is a widening chasm between South African low minimum wage levels and executive director remuneration. This shows that employers may not be addressing market concerns over equitable remuneration,” adds Seegers.
However, Seegers cautions that it’s not about closing the gap once it’s disclosed, but rather understanding what the gap is to rather focus on job creation and poverty alleviation. “The focus needs to be on paying employees fairly: top management needs the recognition to attract the best skills at top level, and at the bottom employees need to be given a fair wage for the job they have performed.”
With a call for change by corporate governance policies and regulation implemented following the global financial crisis, a number of South African companies have embraced the latest King Codes of Corporate governance.
King III sets out guidelines as to how executive remuneration should be structured. It also indicates that in remunerating directors ‘fairly and responsibly’, directors should receive a combination of base salary, short-term incentives and share-based or long-term incentives, and these should be aligned with the strategy of the company and linked to individual performance.
“Globally, there has been a growing appetite for corporate governance. South Africa has followed suite with executive directors and top management proactively linking remuneration policy to business strategy. They have prepared remuneration reports, while disclosing executive remuneration in detail and some companies have started to introduce a shareholders’ vote on remuneration,” says Seegers.
Over the past year, trends have emerged that will see South Africa follow its global peers by using performance conditions in long-term incentives. A large amount of companies are already using performance conditions as a hurdle to vesting of long-term incentives.
“The level and quality of remuneration disclosure is expected to improve over the next year. By April 2012, all companies should be applying King III in terms of remuneration disclosure or explaining their reasons for deviating from the principles,” concludes Seegers.
This article was originally posted on South Africa Business Communities
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