Executive pay of JSE listed companies raises eyebrows: Scantily related to performance

27 Jun 2017

Apart from consistently outstripping inflation, there is little correlation between CEO guaranteed pay and the size and complexity of the organisation they are charged to lead.

Ujuh Reporter 

Captains of industry are raking in salary increases that are far above the inflation rate and their total packages are scantily linked to the performance of their businesses.

This can be gleaned from the Deloitte Executive Compensation Report published this week.

The report finds that increases to CEO guaranteed pay over the last five increase periods exceeded inflation by a considerable margin on a compound annual growth rate basis.

It also found that annual cash bonuses paid to the CEOs and CFOs over the last six years are considerable in relation to guaranteed pay, with only 12% of instances where a bonus was not awarded.

The Deloitte Executive Compensation Report is a detailed benchmark analysis of six years of top executive pay from the top 100 companies listed on the JSE. The study was done t influence debates surrounding the King IV Report on Corporate Governance for South Africa.

The release of the Deloitte study findings comes at a time when executive pay continues to attract intense media scrutiny both locally and abroad, with headlines on executive pay appearing on a frequent basis. Much of the focus this year has been on the growing inequality between those at the top of the organisation and the general workforce.

“Our analysis uncovered some key trends that, in our view, definitely provide vitriol to the debate, and are, as yet, not well addressed in the disclosure within Remuneration Reports, which provide little or no explanation as to the cause or reason for these trends,” said Leslie Yuill, Actuarial, Reward and Analytics leader at Deloitte.

Guaranteed pay levels for CEOs is one of those trends. Apart from consistently outstripping inflation, the Deloitte study found little apparent correlation between CEO guaranteed pay and the size and complexity of the organisation they are charged to lead. This is particularly prevalent for organisations with a market capitalisation of between R5 billion and R50 billion.

On the issue of annual incentives for CEOs and CFOs, the study found that these appear to be “contingent on” performance rather than aimed at “driving” performance. Cases in which companies declined to pay incentives were the exception, rather than the rule.

In the case of CEOs, the Deloitte analysis identified just 15% of instances where an incentive was not paid over the last six years. In the case of CFOs, instances in which bonuses were not paid were even rarer at 9%.

Another issue explored in the Deloitte study is the alignment between executive pay and shareholder value and company performance. “Through the last six years, collectively as a group, executive pay growth is broadly in line with growth in shareholder value creation, but has generally outstripped growth in turnover and headline earnings” the report said.

But Mining, Construction and Resources (MRC) appears to be the exception. Whereas the other sectors have doubled or trebled shareholder value, the MRC sector has destroyed value, to the extent of approximately a third.

Despite this, “the impact on MRC executive pay has not been dramatic, and shareholder and company misfortune has not correlated with executive pay”.

Another key observation from the study is that “remuneration governance and disclosure, bar some shining examples, still has a way to go to ensure that the dialogue is elevated from the acrimonious debate that seems to prevail at the moment”.

The full Deloitte report can be accessed here: https://www2.deloitte.com/za/en/pages/human-capital/articles/executive-compensation-report.html



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