With SA’s economy in decline for nearly a decade, it’s remarkable to read in Deloitte’s new remuneration report that "there are still only a few instances over an eight-year period where a CEO or CFO has not earned a bonus".
As Deloitte’s Leslie Yuill tells the FM: "While low share price growth has had an impact on overall executive pay, we’ve seen a fairly consistent payment of bonuses year in, year out, where they’re almost semi-guaranteed unless something goes wrong."
This is partly why, over the past decade, the total amount paid to executives has more than doubled, according to Deloitte’s report, released last week. It reinforces the view that some CEOs, particularly among the JSE’s smaller companies, exist in an alternative galaxy to staff and shareholders.
Says Yuill: "At the large multinationals, you see a relationship between shareholder return and pay. But once you look at firms with more of a local footprint, it’s very clear that CEOs and executives are getting a much better deal than shareholders."
Over the past decade, average share prices among small caps rose 32%, including dividends, while the total amounts paid to their CEOs rose 200%. By contrast, at the larger companies the total pay rose by 183%, while their turnover rose 208% and the share price gained 412% over that time.
As Deloitte says: "The contrast in size and performance is stark. Only the very largest companies deliver higher than the cost of equity, the mid-tier companies delivering [performance] below the cost of debt, and the smaller companies even failing to perform above the cost of inflation."
There are several reasons for this, says Yuill, including weak boards and strong CEOs who call the shots, as well as the argument that paying below par will lead to scarce skills fleeing to rivals.
This research came in the same week another consultancy, PwC, released its findings of SA’s executive pay landscape, which were marginally more sympathetic to executives.
PwC’s Leila Ebrahimi tells the FM that while it might seem like SA CEOs are earning huge amounts, this isn’t so. "SA executives, at the upper end, are still only earning around half of their UK counterparts on the FTSE 250, even if you adjust for the standard of living. It’s even more pronounced when it comes to the US," she says.
Yet SA has challenges those countries don’t have: unemployment, even at the narrowest definition, is more than 30%, while the lowest salary earners are still earning a pittance.
Critically, PwC explores the "pay gap" — an important debate, since there is talk of amending the Companies Act to force companies to disclose the ratio between their CEO’s pay and that of the lowest-paid employee.
Here, PwC calculated that the median "guaranteed package" of R5.24m of a CEO of a JSE-listed company is 66 times that of someone earning SA’s minimum wage of R43,596 a year.
A typical unskilled worker, it says, is earning R120,000 a year, one-24th of the average CEO pay.
It illustrates that SA, while not as excessive as overseas markets like the US (where the CEO to worker pay gap is 287:1 for the largest 500 companies) and the UK (where the gap is 117:1 for the top 100 companies), still exceeds the rule of thumb laid out by Harvard academic Peter Drucker that the "ideal CEO to average worker ratio" is 20:1.
But PwC’s analysis is also limited in that it only looks at "guaranteed pay", whereas the reality is that most CEOs earn up to two-thirds more through bonuses and incentives. So the money in their pockets will be far more.
Deloitte’s report goes further, looking at a CEO’s total earnings.
In its report, there is one unsettling graph which shows that factoring in all incentives, the CEO of a top-end JSE-listed company earned about 380 times that of the lowest-paid workers. Practically, it means that if the lowest-paid worker is scratching to take home R8,000 a month, the boss’s monthly salary slip is north of R3m.
That might seem egregious, but Deloitte argues there are reasons for this: first, shareholders expect executives to deliver value and will pay handsomely for that, while society would be destabilised if companies were to fail and jobs were lost. As we saw at Edcon.
As a result, Deloitte takes a nuanced view. While it says "unwarranted payment to executives where there is a lack of performance should be identified and punished" and bonuses should not be the de facto norm, "reining in normative executive pay that is warranted for performance is not the answer to society’s real concerns".
The problem is that in many cases, the amount paid isn’t related to performance, partly thanks to weak boards of directors.
Shareholder activist Albie Cilliers cites the example of Zeder, whose CEO remuneration "more than quadrupled from R2.1m in 2013 to R9.5m in 2020 — a seven-year compounded growth of 24%". By contrast, Cilliers argues, Zeder’s share price grew by, on average, 4.75% a year over that time, including dividends.
Evidently, he points out, this was needed to keep the "scarce investing skills, only available in Stellenbosch".
However, Covid-19 has changed things. In its report, Deloitte asks whether Covid-19, which has seen some SA executives slash their salaries, could lead to some countries seeking to "flatten the curve" of executive pay.
Overseas, shareholder voting advisers Glass Lewis expect executives to forgo salary hikes and bonuses next year, particularly if their companies have either cut dividends or retrenched staff.
PwC’s Ebrahimi believes that in a post-Covid world, the amount paid to top executives won’t be permanently reduced. "In a turnaround environment, like we’ve got now, it’s not business as usual. There is restrategising to be done, and [the] success of that will be seen in the number of jobs retained or created, so there must be sensitivity and fair reward given," she says.
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