SA’s Covid-19 fat cats

Bankers might be willing to spend hours poring over the details of your finances. But they become rather coy when it comes to discussing their own money affairs.

So there were awkward moments at the AGM of banking group FirstRand in December, when investors put remuneration chair Louis von Zeuner on the spot over the decision to pay "Covid bonuses" to its top brass.

It was always going to be contentious: Covid whacked FirstRand’s profits, which meant the incentive awards for its top brass hadn’t vested.

No matter — the bank simply created a new "Covid-19 instrument structured to incentivise senior management appropriately". To qualify, the bankers didn’t have to hit any particular targets; they just had to pitch up for work.

"Does the board genuinely believe these payments are fair and ethical in the context of the social and economic devastation wrought by the pandemic this year?" asked Tracey Davies, CEO of investor activist group Just Share, at the AGM. "Is it not concerned about the implications of this largesse?"

Von Zeuner, a respected veteran banker who until 2012 was deputy CEO to Maria Ramos at Absa, gamely argued the point.

"For FirstRand to recover [from] a one-in-a-100-year event like Covid, it is extremely important that we retain our talent and get them to focus, without being concerned on reward, [on] the task at hand," he said.

Von Zeuner said that because Covid had made share prices and profit fall, "the board felt it was necessary and justified to put a Covid award instrument to management which I believe … will be to the benefit of all shareholders".

Many of the executives, he added, had made plenty of "sacrifices": not getting salary increases, deferring bonuses, while their share options for the next few years are unlikely to vest.

Asief Mohamed, CEO of investment company Aeon Investment Management, wasn’t buying it. "Can you address why management only get [the] upside [through] substantial rewards, but do not share in the downside pain when profits are under pressure? Are you and the board reinforcing the view and encouragement of the ugly face and greed of capitalism?"

Not at all, argued Von Zeuner. Many of the executives have a large part of their wealth tied up in shares in the bank, and also took pain. FirstRand, he said, was "very sensitive to the conditions of SA and its people".

Shareholders evidently felt differently.

In the end, 58.7% of them voted against the implementation of FirstRand’s remuneration policy, in terms of which CEO Alan Pullinger got R33.7m (against R41.2m the previous year).

The Public Investment Corp, FirstRand’s largest shareholder with 12%, voted against it because the Covid bonus came "with no performance conditions" to ensure that management’s interests are aligned with those of shareholders. Old Mutual Investment Group, another shareholder that voted against it, said these Covid bonuses are "significant in value, are not performance-based, and vest in annual tranches".

But while FirstRand might have been the first to present such a plan, a number of companies have followed its lead — either shifting the goalposts to ensure their executives still scored a bonus, or ladling on new "Covid bonuses".

It has sparked a slew of unprecedented "no" votes at AGMs in protest at pay packages — and a furious debate about whether these sorts of payments are justified to "retain" rare skills, or are simply a way for boards to game the system to ensure executives come up trumps, no matter what.

The problem is, since these are only "advisory votes" at AGMs, companies can simply ignore their investors’ displeasure.

In an interview, Davies tells the FM: "We need some kind of binding vote on executive pay, along the lines of the Australian model, where if remuneration policies are voted down two years in a row, the entire board has to resign and stand for re-election."

It wouldn’t fix everything, but maybe if there were real consequence, companies would be more attuned to what shareholders — and hopefully society — have to say about executive pay.

Capitec, a rival to FirstRand, was also one of those which shifted the goalposts. And shareholders weren’t impressed: at its AGM three weeks ago, 51% voted against the implementation of its remuneration policy.

The sticking point, it seems, is that in its annual report, Capitec’s remuneration committee decided that "the vesting of awards, including options, will be determined based on the pre-Covid-19 performance".

In other words, Capitec shifted the timeline to qualify for certain incentive awards back to before Covid.

This, it said, resulted "in a fairer outcome, and rewards our executives for their excellent performance during the initial two performance years, as well as their tireless and ingenious efforts for the year under review".

For long-term incentives that were due to vest this year, Capitec said "the 2021 financial year was not considered".

And executives scored. CEO Gerrie Fourie, for example, got a total package of, R49.2m, including R36.1m in bonuses and incentives.

Danie Meintjes, who chairs Capitec’s remuneration committee, tells the FM he was "surprised and disappointed" at the size of the "no" vote at the AGM.

"Covid created total havoc," he says. "It threw us into uncharted territory, and new budgets had to be made. So the board said, let’s set new budgets that are fair, given the circumstances. And as a result, we had to set new bonus targets for the whole group — not just the executives."

Meintjes admits targets were shifted, but says this was in line with the new budgets.

"We moved the goalposts, but only in relation to the new lockdown reality. Executives got zero increases, while other staff levels got between 4% and 6%. So executives weren’t treated with kid gloves."

Asked about the notion that the rules seem to always change to suit the top brass, Meintjes says the bonuses needed to be fair to "thank the executives and staff" for navigating an extraordinary crisis.

"You know, these guys had to close down all the branches, take everyone online and get everyone connected, and find new special ways to treat customers. Capitec’s leaders actually did extraordinarily well — and so you’re not going to reward them for that?" he says.

So why did shareholders vote against the remuneration policy? "They don’t say," says Meintjes. "We invited them to engage with us, and set a specific date, but very few shareholders have respon- ded to that invitation."

Not just the banks

Two weeks ago, retailer Pick n Pay published its annual report, which revealed perhaps the most eyebrow-raising of all the Covid-era pay schemes.

This reveals that Richard Brasher, who is leaving as CEO, is being paid at least R78.3m as a going-away package.

Alarmingly, much of this was given to him at the board’s discretion — including 1.2-million forfeitable shares worth an estimated R41m, the vesting of which was then "accelerated" — to reward his "exceptional leadership" through the Covid crisis.

Evidently this wasn’t enough, because Pick n Pay then slapped on an extra R5m "retirement gratuity".

Brasher also controversially qualified for another R20m bonus "in recognition of the dedication shown in managing and mitigating the impact" of Covid.

How is this, you ask, when Pick n Pay’s pretax profit fell 16.5% to R1.58bn?

Easy — when Covid hit, Pick n Pay revised its target and put in place a "stretch target", in which pretax profit fell 45%. So a drop of only 16.5% means Brasher, and a few of his colleagues, qualified for this bonus with room to spare.

Davies believes this is outrageous.

"To set a ‘stretch target’ of an earnings fall of 45% is shocking. In theory, it is reasonable to adjust targets to suit changing circumstances, but the way they’ve done it seems to guarantee that bonuses will be paid no matter what," she says.

It’ll be interesting to see what Pick n Pay’s shareholders say when they vote on this at the June 28 AGM. Given the recent AGM voting pattern, the retailer should expect a fiery encounter.

In the past year, shareholders have been more strident than ever, voting against the implementation of pay policies at a number of companies. This includes MTN (39.2% against), Shoprite (47.5% against), Sasol (56.2% against) and MultiChoice (32.3% against).

This trend isn’t slowing down.

Three weeks ago, life insurance company Old Mutual held its AGM, at which 45% of shareholders voted against its remuneration policy, and 32% against its implementation.

Intuitively, you’d think the sticking point may be that Old Mutual awarded R35.3m in "one-off" incentive awards to eight executives (R10.1m of this went to CEO Iain Williamson).

However, Itumeleng Kgaboesele, who chairs Old Mutual’s remuneration committee, tells the FM the "no" vote had more to do with the company’s poor performance.

"Shareholders are disappointed with the performance of the business, both in terms of share price and financial results. And it’s true we haven’t delivered to our potential over the past few years," he says.

But Kgaboesele says that when it came to its one-off Covid "top-up", shareholders "actually applauded us" for not changing the conditions to make it easier for executives to hit their targets, or simply excluding 2020 from the calculation (as others had).

"We didn’t shift the goalposts. The 2019 and 2020 incentive plans are virtually worthless, but we didn’t change them. Instead, we added a ‘top-up award’ and, to qualify, the executives have to hit targets for the next three years," he says.

Old Mutual says these awards were made because of "retention risks" when it comes to "critical individuals", as Covid has decreased the odds of earlier incentives vesting.

The problem, say analysts, is that these new awards set up Old Mutual’s executives for a potential windfall, as the new shares were granted based on a share price of R11.94 — close to the lowest level, R9.33, that the share has traded at since it was listed in 2018. If the share recovers to about R20, Old Mutual’s executives stand to make some serious money.

Kgaboesele says it’s wrong to suggest that the management are making off like bandits, while lower-level employees take the pain.

"I can tell you, in tough times when the business doesn’t perform well, the people who feel the most pain are the executives. Last year, for example, the executives saw their bonuses fall by 53%, whereas those at lower levels lost only 7% of their bonuses."

Kgaboesele, who founded investment company Sphere Holdings, says that when investors see compensation schemes "where there are no performance conditions, and no alignment with shareholders, people must push back at this, because it’s unfair".

By comparison, life insurer Sanlam endured a relatively light brush with shareholder discontent last week. There, "only" 26% of investors voted against the implementation of its remuneration policy, and 10% voted against the policy itself.

Sanlam, too, shifted the goalposts. In deciding if its executives qualified for long-term incentives, the board excluded 2020 entirely from the calculation "to allow for the extraordinary effect of the pandemic" and instead added 2021 to the calculation.

The reason for this, Sanlam says, is that "using 2020 data for historic share awards would result in almost all shares failing to vest, creating material retention risks".

Sanlam CEO Paul Hanratty tells the FM that, had 2020 been used, "performance conditions would not have been met and retention of management would have become an issue [which is] often dealt with by new and expensive new share issues".

Not that 2021 will necessarily be a cakewalk for Sanlam: mortality claims due to Covid are likely to be three times as high as last year.

But, Hanratty says, Sanlam didn’t waive the performance conditions, or shorten the time over which this was measured: it simply replaced 2020 with 2021.

Hanratty also rejects the idea that this divorces Sanlam’s top brass from the pain felt by shareholders.

Actually, he says, "management experienced a more severe financial impact than shareholders did during 2020", as their income would take a bigger hit.

This year, Sanlam’s senior management got no increase in salary, while those at lower levels got an inflation-related increase.

By contrast, he says, the fall in Sanlam’s share price is "hopefully a relatively short-term phenomenon".

The ‘retention’ argument

Davies says boards should be required to provide shareholders with proof that "these bonuses are really essential to retain talent".

"What is the point of having performance targets if, when you don’t achieve them, companies simply pay bonuses anyway, on the basis that this is necessary to keep staff motivated and retain talent? What does it say about the commitment and professionalism of these executives?"

At FirstRand’s AGM, Davies challenged Von Zeuner to provide evidence that any of the executives have been poached, or were being courted for other jobs. FirstRand still hasn’t provided these details.

"There are incoherent justifications that don’t get interrogated," says Davies. "The blanket excuse of ‘talent retention’ is insulting, especially when there are other companies that don’t seem to have this problem."

It must be said that not all companies shifted the goalposts. Standard Bank didn’t tinker with its policies and executive compensation fell. Absa made no "Covid adjustments" to its incentives and no extra bonuses were awarded.

CEOs, however, will tell you that the executive drain out of SA is a real thing.

Von Zeuner told the FM this week it isn’t true to suggest the "retention argument" is contrived.

"Over the past 12 to 18 months we have indeed seen that senior staff are being made attractive offers from some of the prominent global banks," he says.

Covid has meant that previous boundaries no longer apply, he says. So banks in Australia and the UK have targeted people whom "we had earmarked to form an integral part of our succession planning pipeline".

Chris Schutte, CEO of SA’s largest poultry producer, Astral Foods, cited exactly this threat of executives being poached in the wake of his company’s AGM in February, where 58% of shareholders voted against the implementation of the pay policy.

"[Our executives are] highly sought after internationally and locally," he told journalist Chris Barron at the time, adding that they are approached by opposition companies "almost once a month".

"I don’t want to jeopardise them by not remunerating them in line with market trends," he said.

Schutte — who has contracted Covid and had heart bypass surgery in the past year — told Business Times that shareholders "want to know why we’re losing executives, but at the same time they vote against the policy that should keep them in SA".

However, Aeon’s Mohamed says the "skills" argument doesn’t reflect well on the board, for a number of reasons.

"Even if this is true, boards have got a fiduciary responsibility to make sure there’s a solid pool of new talent, but they seem to be failing. If they did that, they wouldn’t be so worried that they’d have to pay vast amounts to ‘keep’ talent," he says.

Mohamed says many South Africans — more than 1-million — have lost jobs over the past year, or seen their salaries cut. "But the executives seem to be taking no pain. It’s heartless in an environment where everyone else is taking pain, but they’re not," he says.

It’s worse, he says, when companies set the bar so low that CEOs can’t help but clear it. "Clearly, some CEOs are worth it. Capitec, for example, actually succeeded in banking a whole new market. But other companies, like Santam, have just trod water," he says.

This is the nub of the issue: while large salaries may be justified for companies that are really growing, hiring new people and expanding the economy, other companies are lavishing huge payments on CEOs who don’t deserve it.

Last year, Woolworths paid retiring CEO Ian Moir R77m after his ill-advised gamble to buy Australian store David Jones backfired badly, leading to a R13bn write-off, and a 66% slide in the share price.

Most shockingly, Moir was paid a R34m "restraint of trade" payment as part of his exit package.

As Mohamed told the FM at the time: "Given Ian’s performance, I’d imagine they’d almost have paid a competitor to take him, rather than have paid him a restraint."

It’s little wonder that, in November, 82% of Woolworths shareholders voted against the company’s remuneration implementation. It is instances like this that shred the credibility of remuneration committees.

A global problem

It would also be wrong to think SA is somehow an outlier. Globally, the C-suite has been rewarded over-the-bar during Covid, even as millions of jobs have been shed to keep companies "competitive".

The poster child for this glaring disconnect took place at Norwegian Cruise Line Holdings, which paid CEO Frank Del Rio $36.4m (double that of the previous year) even though the company lost a record $4bn, and staff salaries were cut by 20%.

It’s small wonder that 83% of shareholders gave it the thumbs down.

Compensation adviser Luis Navas told the Miami Herald: "You have to remember that 99.99% of Americans don’t ever make this kind of money in their lifetimes. You’ve got to be sensitive to that."

Examples like this reinforce the suspicion that the entire apparatus is manipulated to suit executives — perhaps partly because the boards making the decisions are composed of former CEOs themselves.

Remuneration consulting firm Equilar told The New York Times this month that CEO pay in the US jumped 14.1% last year, while the average worker got a 1.9% raise. It meant CEOs earned 274 times the pay of the average worker — up from 245 times previously.

"While Americans were cheering on the workers who were keeping our economy going, corporate boards were busy coming up with ways to justify pumping up CEO pay," Sarah Anderson, global economy director at the Institute for Policy Studies, told the newspaper.

And if you think Brasher’s pay package is ludicrous, consider that the US’s best-paid CEO, Alexander Karp of data mining company Palantir Technologies, got compensation of $1.1bn last year.

Second on the list was Tony Xu, the CEO of food delivery business DoorDash, who was paid $414m.

Packages like this have meant that investors in the US and the UK have also voted against pay packages in unprecedented numbers.

But, as The Financial Times argued, simply railing against high numbers means you miss the distinction between instances where a CEO is well paid if a company shoots the lights out, and when he is paid for pedestrian performance.

"Of course there is excessive CEO pay. But it often lies outside the eye-catching numbers or plans. It is those who deliver mediocre performance year in, year out with a high-six or low-seven figure package that is just low enough to keep the pitchforks at bay."

Duncan Artus, CEO of investment firm Allan Gray, which has voted against many pay packages in the past year, says this is why it’s a complex and nuanced issue.

"This year will highlight which companies have good remuneration committees, as clearly there will be more discretion involved than in a normal year."

A few weeks ago, Allan Gray governance analyst Vuyo Mroxiso wrote that while Covid meant some executives’ efforts hadn’t translated into financial results, she warned that "discretion can be misused as a tool to inappropriately reward executives in periods of underperformance".

A ‘difficult year’

"It was a very difficult year to deal with remuneration," says Hubert Brody, former CEO of transport company Imperial who chairs Nedbank’s remuneration committee.

"It isn’t a perfect science, and remuneration committees have a really difficult task of balancing the interests of many stakeholders — shareholders, regulators, society, staff and others. And this is in an environment where the competition for skills is real."

Brody points out that shareholders don’t have a unified idea of how executive pay should work during Covid. So boards have to be rational and go out of their way to explain their reasoning.

Clearly, Nedbank could have explained a whole heap better.

At its AGM at the end of May, 34% of shareholders voted against the remuneration policy, and 20% against the implementation thereof. Brody says he was "disappointed" by the vote, as Nedbank has typically had a 98% approval vote in recent years.

"However, the outcome was not entirely surprising to me, given the complexity of remuneration issues right now, and in the midst of Covid where we had to balance so many different considerations," he says.

The sticking point, according to Brody, was Nedbank’s decision to issue long-term incentives to its 14 executives, with only 80% of them having performance conditions, while the other 20% vest automatically over time. In all, Nedbank issued incentives worth R146.7m to "key and scarce talent".

Brody says it used to be that all the incentives were performance-based, but this changed because of Covid and some shareholders saw this "as a regressive step."

But he says Nedbank isn’t simply lavishing bonuses on executives, even though profits are falling. Last year, for example, the bonus pool fell 29%, as earnings fell 56%.

How about the wider social context? Do remuneration committees look at what is happening in the wider society — unemployment and relative salary levels?

Yes, says Brody. Most people don’t see how much work these committees put into understanding "parity and fairness".

"We consider various ratios across the group, and run software to identify any inconsistencies which we then have a careful look at.

"Our annual increases [for unionised staff], which normally include lower-paid workers, are consistently higher than at the executive levels," he says.

As a result, says Brody, Nedbank is "contributing positively to addressing inequality in society".

It’s a sentiment you’ll hear from other remuneration committees too — even if it’s hard to entirely square the vast amounts paid to CEOs with the fact that 43% of the country is out of work, or the fact that 75% of South Africans earn under R7,500 a month.

FirstRand’s Von Zeuner says the bank is "extremely sensitive" to the wider inequalities, both in society and in the bank, in setting executive pay. This, he says, is partly why FirstRand’s executives got no increases last year.

He says it’s more complex than simply looking at the amounts involved. "One needs to carefully consider accountability and responsibility linked to a specific position and the competitiveness of the market to retain top and experienced talent."

But he says executive salaries have indeed been rising — partly since SA executives have proven to be hot property overseas. "Things have evolved over many years. From talent being local and industry-specific, it is now a lot more mobile. Geography does not really matter, and it is not uncommon to see financial services [executives] being recruited by telecommunications companies," he says.

Companies are laying the groundwork for what could be windfalls in the next few years. We’re starting from a really low base, so the options being awarded could massively outperform simply because of the economic recovery. This is why, right now, SA has a once-in-a-generation opportunity to rethink executive pay

—  Tracey Davies

Capitec’s Meintjes says that, in the end, executive salaries are a factor of supply and demand. "Companies compete in a specific market for talent, and salary levels are based on market reality," he says.

In other words, it’s not so much the amount that the CEO gets paid when he or she is at the company; it’s about what it takes to get them there, and keep them, if other companies are throwing vast amounts at them to lure them away.

But the presence of "remuneration consultants" — hired by boards to assess the levels of pay packages — only makes it worse. If anything, they push up pay by presenting salary metrics to companies, illustrating what low, average and highly paid executives in those industries earn.

Says Meintjes: "In Capitec’s case, I think our executives are excellent, so why would I want to pay them at less than the higher levels?"

But if all the companies feel this way — because none of the boards, even if they’re deluded, will admit they’re average — it becomes a race to the top. "Companies focus on not being out of line with the market," says Meintjes.

Social resentment

But are the large amounts — like the R78.3m given to Pick n Pay’s Brasher, or the R77m for Woolworths’ Moir — even necessary?

It’s an apposite question, which recalls the famous response of Royal Dutch Shell CEO Jeroen van der Veer after 59% of shareholders voted against his €11.6m package in 2009.

"If I had been paid 50% more, I would not have done it better. If I had been paid 50% less, then I would not have done it worse," he told the Financial Times.

Unusually, Van der Veer took the criticism on board entirely, telling Dutch journalists that "if the whole of society in its generality thinks the remuneration model is a problem, that does mean that you have to change".

It’s clear, says Davies, that remuneration is a problem. And, she says, companies ought to pay attention to why society thinks it’s a problem.

"If these perceptions of fairness mount, it can create massive social resentment. So when someone like [EFF leader] Julius Malema says ‘let’s nationalise the banks’, people can think, ‘well, maybe it’s a good idea to redistribute assets; we have nothing to lose’."

Davies reckons forcing companies to report on the gap between the lowest and highest paid workers (as happens in the US and UK), and implementing the "two strikes" rule on voting at AGMs, would help.

"Unfortunately, proposals to do just this remain locked in the bureaucracy at Nedlac — the forum for business to meet labour and the government — so don’t look like being passed any time soon," she says.

As you can imagine, directors don’t much like this idea.

"It seems harsh, and a somewhat blunt instrument, particularly in such exceptional circumstances as what we have experienced now," says Brody.

"However, if boards consistently ignore guidance and shareholder views on key topics, there should be measures to remediate the situation."

If boards don’t take into account the strong feelings of resentment against high executive pay, it could come back to bite them

—  What it means:

Sanlam’s Hanratty is equally unconvinced. "The two-strike rule has shown some unintended consequences in Australia. We are not convinced it will be the best approach for SA," he says.

But Aeon’s Mohamed reckons that nothing will change until that two-strike rule is implemented.

"As it is, the boards don’t really listen right now, because they know nothing is riding on it," he says.

Business lobby groups, he says, are fighting against this, as well as efforts to force companies to disclose the pay gap.

"It is time parliament takes a strong stand here," he says.

Davies says the time to fix the broken system is now, as the economic system is being reset.

"Right now, companies are laying the groundwork for what could be windfalls in the next few years," she says. "We’re starting from a really low base, so the options being awarded could massively outperform simply because of the economic recovery."

This is why, right now, Davies believes SA has a once-in-a-generation opportunity to rethink executive pay.

*The writer has shares in the financial companies mentioned.