South Africa has a large and growing pay gap. The pay gap between executives and employees at the lower end of the pay scale is widening. This has seen an increase in shareholders ‘interest in directors’ compensation.
South Africa has the highest wage inequality in the world, with a Gini coefficient of 0.639. Therefore, it is not surprising that there has been a concerted effort to put more emphasis on director compensation guidelines in the latest set of corporate governance rules published in the country.
Corporate governance guidelines are established in a series of reports, known as King reports. the South African Institute of Directors has published four. The first was published in 1994 and subsequently revised in 2002 (King II), 2009 (King III) and 2016 (King IV). The reports outline a set of voluntary principles and recommendations that apply to a wide range of organizations in the country, including listed and unlisted entities.
The latest – the King IV Report – is more explicit about executive compensation.
We interview South African Institutional Investors, Compensation Committee Members, Chief Executive Officers and Chief Financial Officers (CFOs) of financial services companies listed on the Johannesburg Stock Exchange. Our goal was to establish their views on the governance of pay. We selected this sector because the wage policies and practices of various financial services The companies recently received considerable scrutiny from shareholders.
Our findings showed that the majority of participants welcomed the three-part compensation report and King IV’s proposed single-figure pay disclosure. They indicated that these recommendations markedly standardized the salary reports of South African companies.
But there were also criticisms – and notes of caution – issued by many of those interviewed.
Expert Opinions on King IV Directors’ Payment Tips
The guidelines refer to executive and non-executive compensation.
They say executive compensation should be based on performance. Non-executives should receive a base fee and fees for attending the meeting.
The guidelines also recommend that companies listed on the Johannesburg Stock Exchange publish a background statement, remuneration policy, and implementation report. Details should be provided on the salary components assigned to individual directors. Additionally, publicly traded companies must indicate how they intend to respond if a substantial number (defined as 25% or more) of shareholders cast their vote against implementation reports or payment policies.
Compensation committees must also ensure that directors’ compensation is disclosed transparently. This will allow investors to make informed voting and investment decisions. Institutional investors can have considerable influence over corporate policies. Their investment in local businesses gives them substantial voting and bargaining power. Senior executives such as CEOs and CFOs, as well as members of the compensation committee, often discuss their compensation concerns with these powerful investors during private meetings.
Some interviewees cautioned that local compensation committees must ensure that compensation reports do not get too technical.
Some also requested more guidance from the King Committee to make quantum payment disclosures more comparable across sectors.
They also emphasized that compensation decision makers should warn against over-reliance on consultants when compiling pay packages. Research shows that this can result in a salary benchmarking. This is when compensation is set at a higher or comparable level than a comparable organization. Salary benchmarking can potentially lead to higher than average pay levels.
For their part, institutional investors interviewed indicated that they often meet with South African companies in which they have invested to discuss salary issues before casting their vote at annual general meetings. The majority suggested that shareholder votes on directors’ compensation should be binding.
On the contrary, the members of the remuneration committee and the top executives preferred the advisory vote suggested by King IV.
Everyone we interviewed agreed that there should be clearer consequences for companies if more than a quarter of their shareholders voted against their pay policies and implementation reports.
They also emphasized the importance of fair wage practices given the country’s large wage gap. Two of them referred to “equal pay for work of equal value.” Consequently, directors should be compensated based on their individual efforts and contributions to their companies.
Additionally, interviewees proposed extended buyout periods for stock options to ensure executives have a long-term focus.
They also agreed that executive compensation should be linked to financial performance metrics, as well as performance results related to sustainability. This led them to suggest that in the future the remuneration of directors should be more clearly linked to:
- the triple bottom line context. This refers to the economy, society and operating environment, and
- the six capitals. It refers to financial, manufactured, intellectual, human, social and relational and natural capital.
Ethics and social committees should help compensation committees determine how they can link sustainability issues to executive compensation.
Some also issued a cautionary note on modifying wage regulations in light of the considerable regulatory burden faced by JSE-listed companies. Therefore, improved compensation guidance could be offered in a guidance note and in the future King V.
In the context of the current pandemic, director compensation policies and practices are likely to receive even more attention. Companies are likely to face more opposition in the future if their leaders’ salary is not clearly tied to long-term financial and non-financial performance metrics.
JSE-listed companies are encouraged to implement fair and responsible director pay policies and better align their pay practices with King IV guidelines.
* Marilee van Zyl contributed to this article. She completed her MCom degree from Stellenbosch University and is an assistant governance consultant at FluidRock Governance Group.
Nadia Mans-Kemp, Scholar, Department of Business Management, Stellenbosch University