It has been just over twenty years since listed companies were first required to disclose the remuneration of their top executives, and ten years since the introduction of non-binding advisory votes on remuneration. In that time there has been no pause in the precipitous surge in executive pay awards.
The various iterations of the King Codes on Corporate Governance have in turn demonstrated a stronger commitment to sustainability and the interests of a broad range of stakeholders. The release of King IV in 2016 suggested that the Institute of Directors, which ‘owns’ the King Codes, had come to realise the appropriate role of a powerful business sector in a relatively new democracy with extraordinarily high levels of inequality.
Principle 14 of King IV states that “the governing body should ensure the organisation remunerates fairly, responsibly and transparently…”, and recommended practice 29 states that “the remuneration policy should address organisation-wide remuneration and include provisions for…fair and reasonable pay for management in the context of all employees.”
Section 30(A) of the long-mooted Companies Amendment Bill, recently released for yet another round of public comment, helps to give life to that recommendation, by requiring disclosure of the total remuneration of the top five percent highest paid employees and the total remuneration of the bottom five percent lowest paid employees of the company. This aims to move executive pay out of the dissociated bubble in which it currently resides so that stakeholders can assess whether it really is “fair and responsible” in the context of the pay of the thousands of workers who are crucial to the success of the enterprise.
Given this alignment with the King Code, it is surprising that some senior members of the business community have expressed such strong opposition to the proposed amendments. This opposition echoes business’ strident campaign against the JSE’s plan for remuneration disclosure back in 2002, which claimed that the best executive talent would walk away from opportunities at JSE-listed companies if they were required to disclose their pay.
There is of course no evidence this ever happened. Indeed, far from disadvantaging them, public disclosure of pay levels seems to have played to the interests of executives, as it provided the basis for the “benchmarking exercises” that have contributed significantly to the ever-upward ratcheting of executive pay levels, regardless of performance.
The proposed amendment requiring disclosure of the pay gap must be protected from any dilution by lobbyists during the parliamentary hearings scheduled for late October. Currently the parameters of executive pay are totally dependent on the machinations of remuneration committee members and remuneration consultants. They operate in a bubble that endorses a self-serving version of free markets. A pay gap ratio provides a glimpse of the real world. It will alert institutional shareholders to a broader societal context and, hopefully, prompt them to take action.
In the US, which leads the world in the peaking of executive pay, CEOs earned around 42 times the pay of the average worker in 1980. In 2020 this had risen to 400 times. Pay structure in the UK has followed a similar trajectory, and research by the High Pay Centre reveals there’s been little change since 2020, the year when listed companies were required to disclose the gap between CEO pay and the bottom quartile of employees.
This is important information because the South African remuneration industry mimics the UK and the US rather than more moderate European and Asian countries. It is also why we must be wary of warnings that our proposed amendments will discourage foreign investors. Trading partners will likely be encouraged by legal developments requiring pay gap disclosure, realising their necessity in dealing with one of the country’s most crippling socio-economic issues.
In the UK, as in the US, executives are grabbing ever-more valuable pay increases not because they are generating ever-higher profits or because of a shortage of CEO talent but because of the unprecedented power they have to influence their own remuneration. As Lawrence Mishel and Jori Kandra noted in a 2021 research report, “CEOs of the largest firms in the U.S. earn far more today than they did in the mid-1990s and many times what they earned in the 1960s or 1970s. They also earn far more than the typical worker, and their pay—which relies heavily on stock-related compensation—has grown much more rapidly than a typical worker’s pay.”
The executive remuneration trajectory has far more to do with unrestrained executive power than it does with rewarding real value creation. That power is exercised through the board of directors and specifically the remuneration committee (Remco). It is clear from the sky-rocketing levels of shareholder disapproval of executive pay packages in recent years that remuneration committees are far more heavily influenced by collegial relationships with fellow executives than they are by the views of shareholders.
The second most significant proposal in the Companies Amendment Bill attempts to address this by scrapping the current non-binding advisory votes on executive remuneration and replacing them with ordinary resolutions with consequences. The Bill would require that future changes to a remuneration policy can only be implemented if 50% or more of shareholders have approved it.
The more significant change relates to the vote on the implementation of the remuneration policy: the Bill would require the non-executive directors who sit on the Remco to resign from the committee if the implementation vote does not secure at least 50% approval. These directors would be unable to serve on the committee for three years. They are not required to resign from the board, making the proposed provision less onerous than the Australian two-strike rule. Unsurprisingly, there has been a chorus of opposition to this proposal from the business sector, most notably from the Institute of Directors and the King Committee.
The introduction of consequences for the remuneration votes is recognition that the non-binding resolutions have had absolutely no impact on soaring CEO pay. They were devised to allow shareholders to express their concerns about the policy and its implementation in the hope that this would prompt engagement that would lead to changes. That the majority of JSE-listed companies continue to record 25% plus opposition to the implementation vote (and in many cases more than 50%) is evidence of the inevitability that a vote without consequences will have no consequences.
Those opposing this change argue, naively, that it is inappropriately retrospective. In essence they are arguing that a remuneration committee should have no concerns about their decisions on remuneration being unintentionally boosted by equity market conditions.
Generally about 60% of the value of executive remuneration is attributable to share awards. This can be much higher or a little lower depending on the share’s performance between awarding and vesting. That short-term performance may have little or nothing to do with the company or the executive’s performance.
Recall the outrage in 2022 when it was disclosed that Sibanye Stillwater CEO Neal Froneman was in line for a R300m payout. It turned out that the R300m was largely attributable to a huge spike in the share price which boosted his overall package. The subsequent drop meant that Froneman did not receive a package worth R300m. However, the reality is that Sibanye-Stillwater’s Remco had granted Froneman an open cheque. They had made absolutely no provision for clawing back massive unintended gains. And, because the Remco faced only a non-binding advisory vote on the implementation of the policy, it meant they had no reason to be concerned about the possible consequences of their decisions.
The prospect of being dropped from the remuneration committee for three years, gives them some reason to consider these potential consequences.
The proposed changes to the treatment of remuneration disclosure in the Companies Bill should be welcomed by anyone who claims to care about inequality in South Africa. We should also be very well aware that, given the developments over the past twenty years, these tweaks to the law may not be sufficient to restrain the powerful vested interests behind ever-increasing executive remuneration.
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