Executive remuneration is increasingly coming under scrutiny from shareholders, investors and other stakeholders, according to a report issued by PwC today. “New legislation, regulations and corporate governance principles are giving shareholders and institutional investors more say on executive pay,” says Gerald Seegers, Director for Human Resources Services at PwC Southern Africa.

“The close scrutiny of executive pay has added a compelling need for organisations to revisit the approach to the entire ‘pay strategy’, with CEOs worldwide acknowledging the current pay for performance models are not working as well as expected, and have become too complex. This complexity has resulted in some pay models having become impossible to understand and this has also affected their effectiveness as a means of incentivising workers.”

PwC’s fifth edition of ‘Executive Directors’ Remuneration’ Report, shows there is a general consensus that the current situation cannot continue “Our report confirms that in many cases there has been some level of restraint on executive pay recently, but probably not at the pace or level that we expected. South African executives must lead the way, and there is a genuine intent on the part of our business leaders to make a difference.”

One of the avenues being considered in industry is for executives to forgo a pay increase and redistribute the funds to lower-paid employees to close the pay gap and kick-start the monitoring process going forward. Are these short-term fixes sustainable? We consider a number of contributing factors and challenge all stakeholders to achieve a fairer system. The issue of the pay gap is gaining momentum both locally and internationally with the risk that if not properly understood and dealt with, it could result in regulatory intervention that could have undesired consequences. Employers still need to have flexibility in managing their pay structure, and it would be detrimental to have the Government or any regulatory body dictating to business how much they should pay their employees. “Ultimately the onus is on executives to act first and ensure that regulatory intervention is avoided,” comments Seegers.

The concept of a two-tier remuneration report is gaining traction amongst shareholders, as this will allow them to have some say on pay in the future. Investors and shareholder activities are putting increasing pressure on companies to explain how they get to the value of the executive bonuses.

An alternative model is also proposed for senior executive pay, whereby long-term incentive awards are granted based on pre-grant criteria, against a balanced scorecard. Awards are then made in shares, which vest after an extended period. “One-size does not fit all, but we do believe that a performance-on-grant model combined with longer vesting and enhanced shareholding requirements creates a significantly better norm than the current model,” comments Seegers. “It also reduces complexity and improves transparency for investors.”

Total Guaranteed Packages

Total remuneration levels for executive directors on the JSE continue to increase over the past 12-month reporting period and varied considerably from industry to industry, and across large, medium and small-cap companies. The general trend for total guaranteed package (TGP) increases across all JSE companies for the period 1 May 2012 to 30 April 2013, was down to 4% from last year’s average TGP increase for the same 12-month period of 8%.

The median TGP for the CFOs of large-cap basic resources companies has shown a significant increase (R4.7m), after a decline last year (R4 m). “Moderate increases for incumbents are in line with those for their executive colleagues, but the shortage of skilled and experienced CFOs means that incoming CFOs are demanding higher packages.”

The substantial increases in median TGP for the executive directors of large-cap basic resources companies (R4.9m) derive from the shortage of technical skills for operational executives, with incoming staff demanding higher packages.

Large-cap companies in the financial services sector had modest increases in levels of TGP for the CEO and executive directors, driven largely by inflationary increases. “The decrease in the TGP for CFOs (2012:R3.4m; 2011: R3.6m) indicates the depressed state of large financial sector businesses.”

A significant drop in the TGP for large-cap CEOs at industrial companies may be seen (2012: R10m; 2011: R17m). “Times have been tough, and incoming CEOs are accepting lower packages,” explains Seegers. The tougher times faced by the CEOs of large-cap companies in the services sector are indicated by the significant drop in the TGP (2012: R5.4m; 2011: R6.1m). The packages of executive directors in this sector have also declined.

The actual payout levels for short-term incentives for the reporting period did not fare well, with large-cap industries experiencing a decline across all roles. The most significant impact was seen in the CEO’s role, where a 28% decline was experienced.

Profile of an Executive Director

The report also discloses that as at 30 April 2013 there were a total of 1,024 executives, which means there was an 11 percent decrease in the number of executives listed as directors in 2012. Except for the basic resources and services sectors, reasonable decreases were shown in the number of executive directors.

A closer examination of this shrink in numbers discloses that many companies are limiting the number of executive directors to the minimum requirements called for by the King III Report on Corporate Governance. The management driving the company is found in its executive committee. King III requires disclosure of each individual director in terms of the new Companies Act of 2008. Disclosure may be on the decrease, when regulation was designed to increase it.

Not surprisingly, this year’s report shows that executive directors have aged. The median is 51 (2011:50), and the average overall is 54.

The demographics of executive directors are varied. White representation decreased by 8.9% from 81.5% in 2002 to 72.6% in 2012, averaging a decrease of about 1% per annum. On the other hand, African representation increased slightly by 2.3% at this level over the same period from 10% to 12.3% in 2012. The representation of Coloureds increased by 1.2% from 3.4% in 2002 to 4.6% in 2012, and the representation of Indians increased by 2.3% from 5% in 2002 to 7.3% in 2012.

The percentage of women operating in executive roles has increased from 8% in 2012 to 10% this reporting period.

Corporate governance developments

The Institute of Directors of Southern Africa recently issued updated practice notes on King III remuneration principles, which provide more detail in the interpretation and application of existing recommended practice. The updated Practice Notes are aimed at taking remuneration governance and disclosure to the next level in South Africa, without introducing legislation as is the case in the UK.

The financial services industry remains the most regulated industry with regard to executive remuneration. The European Commission’s Fourth Capital Requirements Directive (‘CRD IV’) may be applicable to some South African financial institutions.

Seegers concludes: “South African organisations are going to greater lengths than before to define exactly how their executives are being paid, using benchmarks such as overall revenue, profits and share incentives to guide them.

“Companies are trying harder to explain to shareholders and other stakeholders their executive remuneration programmes. Overall there has been a continued trend in increase in executive remuneration packages but a modest decline in options. Going forward, we are likely to see new pay models emerge as a means to incentivise executives.”