Piling on the fat in the food aisle

Comparing how investors feel about the remuneration policies of major food retailers, it would seem from the “against” votes in 2024 that Shoprite’s shareholders fear there are prices they can’t trust, Pick n Pay’s owners feel the pay packages are not inspired by them and Woolworths’ investors believe that management did not make the difference.

The only retailer yet to be tested on whether it measured up to its slogan in 2024 is Spar. Perhaps shareholders will have felt that they and the board were all better together.

With these nonbinding remuneration votes a “pass” is 75%. Anything below that means companies have to sit down with dissenting shareholders and talk about their concerns. Supposedly, the board and its remuneration committee could then tweak a few things that would make shareholders far more likely to vote in favour of the packages.

And it’s not like shareholders automatically say no to high pay. In many instances the CEO and fellow executives are being paid a significant amount, and more than 75% of investors vote in favour. Reasons can include variable pay being clearly and forcefully linked to performance; measurable targets being met; share schemes being reasonable rather than over the top; true market-beating returns; company innovation; market share gains; and decent dividends where applicable.

But so far this year, not one major food retailer has passed the test.

Given that these remuneration votes have existed for a few years now, it’s not like the retailers haven’t had quite a few chances to get it right when it comes to the management pleasing the owners.

“For the second consecutive year, Woolworths shareholders have rejected the company’s remuneration policy, failing to secure the required 75% approval at the AGM,” says Kwanele Ngogela, senior inequality analyst at Just Share. “Additionally, the implementation report on executive pay has faced similar disapproval for three consecutive years. This highlights growing shareholder dissatisfaction with the company’s approach to executive remuneration.”

In the year, the retailer’s attributable profit halved after the one-off benefit from getting rid of David Jones fell away, its return on equity dropped to 28.6% from 39.9%, profit margins narrowed, the share price sank and the dividend slumped 15.2% year on year.

Woolworths didn’t respond to e-mailed questions about the AGM. CEO Roy Bagattini was paid R65.3m this year and while it was much less than the previous period’s R122.5m, which came about after short-term and long-term incentives produced extreme returns, it may have been the catalyst for the rush to “benchmark” remuneration and reward executives just to keep up with their rivals.

At Pick n Pay, which has a February year-end, Sean Summers replaced Pieter Boone as CEO on September 30 2023. Boone received a termination settlement with total guaranteed pay of R25.3m, while Summers was paid R10m for his first five months and had 4-million performance-based shares thrown into the mix. This retailer, which saw its share price cut in half, didn’t “pass” either, though it was close to making the cut.

From an investors’ perspective, there wasn’t much in it for them. The headline loss per share year on year widened significantly, the return on invested capital fell to 1.2% from 10.3%, return on capital employed swung into negative territory from a positive outcome in the previous period and no dividend was declared. All of which makes Boone’s payout after seven months of work in the 2024 fiscal period appear unbalanced, severance package or not.

This involves transitioning from adherence to the national minimum wage towards paying workers a living wage, ensuring they can afford a decent standard of living

—  Kwanele Ngogela, Just Share

Poor performance resulted in executives forfeiting some of their incentive rewards and Pick n Pay, which declined to respond to e-mailed questions, said in its annual report: “The newly appointed leadership team’s salary packages have been reviewed and benchmarked against their new roles and relevant market data to ensure appropriateness. Where necessary, salary packages have been adjusted to align to the new roles and expectations of the role.”

From the voting outcomes, it seems shareholders will believe it when they see it.

In the retail sector “it is common to see a CEO brought in to replace underperforming leadership, as recently observed with Pick n Pay and Woolworths”, Ngogela says. “This leads to extraordinary rewards that become entrenched and subsequently serve as benchmarks for other companies, perpetuating a cycle of escalating pay levels. In South Africa, CEO packages are frequently benchmarked against those in the UK, often under the self-serving justification that these executives will leave if not compensated at comparable levels.”

Shoprite’s performance was the most dismal with more than 40% of shareholders saying “no way”. CEO Pieter Engelbrecht’s pay leapt almost 29% to R83.3m from R64.7m in the prior year after a short-term incentive target was achieved. This made him the year’s best-paid CEO among the big food retailers.

Profit attributable to the company’s owners rose 6.2%, the total dividend was up 7.4% and return on equity inched up from 24.8% to 26% for the year ended in June. A solid financial performance vs particularly stellar pay.

Ngogela explains that disparities arise because “the lack of binding shareholder votes on remuneration, coupled with the absence of tangible consequences, has allowed companies to continue with minimal accountability”.

“While companies are required to engage dissenting shareholders, these engagements rarely result in substantial changes to remuneration policies,” Ngogela says. “This cyclical approach fosters a cynical view that such engagements are merely tick-box exercises, often serving to shield corporate executives and remuneration committees from genuine responsibility and meaningful reform.”

Shoprite surpassed the 75% mark in previous years, but for the 2024 fiscal period, despite having had five remuneration committee meetings and using four outside advisers — REMchannel, PwC, 21st Century and Vasdex Associates — it flopped.

“Shareholders are increasingly dissenting against excessively generous and frequently unjustifiable executive pay packages,” Ngogela says. “These payouts are often determined at the discretion of remuneration committees, which heavily depend on advice from remuneration consultants — part of a global industry that has, for decades, prioritised serving the interests of executives, their paymasters, over those of shareholders.”

Still, Shoprite says it conducts extensive engagements with shareholders ahead of the AGM, “which includes an invitation to any shareholder to engage with our chair, the remuneration committee chair and members, and the management team”.

Nonetheless, following the AGM vote, a stock exchange news report “was issued requesting feedback from shareholders. No adverse comments were received,” the company says.

Perhaps engagement is also increasingly apathetic among the investors after years of nonbinding votes haven’t resulted in substantial change.

So, what do shareholders want? It’s not rocket science. Just Share advocates for fair and responsible remuneration that prioritises the broader stakeholder community, including workers, rather than focusing solely on shareholders or fulfilling executives’ economic self-interest.

The activist shareholder group believes remuneration policies should emphasise stakeholder-centric value creation, balancing benefits for shareholders, workers and others to promote equity and foster sustainable, inclusive growth.

“This involves transitioning from adherence to the national minimum wage towards paying workers a living wage, ensuring they can afford a decent standard of living,” says Ngogela. “At the same time, executive remuneration must be reasonable, with clear and measurable economic, social and governance targets linked to both short-term and long-term incentives, and aligned with company performance and broader economic realities, addressing the country’s inequality, which is largely driven by pay disparities in the labour market.”