Executive compensation corresponds directly with turnovers and earnings

26 November 2018 Consultancy.co.za

Senior Executives in South Africa have had to navigate stressful times recently, although a new report on executive compensation from global professional services firm Deloitte reveals that the performance of the entire firm in terms of turnovers and headline earnings corresponds with the level of pay. 

The discussion around executive compensation is one that provokes strong views in most contexts, particularly in developing market such as South Africa where the substantial pay packages become especially prominent and conspicuous in light of rampant unemployment and income inequality.

Dissatisfaction with executive pay came to light in South Africa recently through the example of South African Airways, as the struggling airline made a number of international senior appointments for whom compensation packages stand between R2 million and R6 million annually.

Indexed pay vs performance

On the other hand, South Africa is currently looking to diversify its economy and focus on significantly expanding its innovative capabilities. In such a scenario, executives with experience and innovative capabilities are of the essence, and the overall sentiment has come to be more receptive of the incentives required for such innovation.

According to Big Four accounting and advisory firm Deloitte, this direct link between pay and overall company performance is beginning to manifest itself clearly. In a new report, the firm zooms in on the current distribution of executive pay across South Africa and elucidates some of the strengths and weaknesses.

For Deloitte, the debate on executive compensation revolves around three factors, including the balance between “performance and reward,” the structure of the “pay delivery mechanisms” in themselves, and the regulatory environment surrounding executive pay.

6 year annual CAGR

In order to obtain an overview of the executive pay scenario across South Africa, the firm studied the compensation structures across the top 100 firms listed on the Johannesburg Stock Exchange. Within this broad range of firms, Deloitte focused on certain key sectors that constitute the lion’s share of South Africa’s output.

These include: the financial & property investment sector – which is expanding in line with South Africa’s growing consumer sector –; in addition to industrial & manufacturing companies; commercial, technical and trading companies; and firms operating in the domain of mining & resources.

At a preliminary level, the report’s findings appeared fairly intuitive, in that the level of compensation corresponds with the size of the firm. While a number of other expenditure priorities have fluctuated in line with market trends in recent years executive compensation is one area in which companies have maintained a great degree of consistency.

3 year annual CAGR

As stated in the report, “although one sees considerable variability in performances between larger, and second tier companies and between the four chosen sectors, it appears that executive pay has been resilient in the face of varying company or sector performances.”

Strikingly, the report found that the turnover index of a company as well as its headline earnings correspond directly with the senior executive total annual compensation (TAC) index and the total remuneration index. A similar correlation was found between a firm’s TAC index and its shareholder value index.

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Say-on-pay model of executive benchmarking gaining support in South Africa

06 August 2018 Consultancy.co.za

As organisational priorities shift in accordance with overall market trends, an increasing body of research is suggesting a shift in the evaluation metrics of senior executives. A new PwC report suggests that executive remuneration in South Africa – currently at an average just short of $1.1 million – should be gradually brought within the “say on pay” domain.

Executives in South Africa have had a somewhat mixed year. The economy is still geared for growth, and business opportunities are plentiful, but key barriers in the form of price declines, corruption and administrative inefficiencies have brought about a situation where the optimism displayed by some top tier executives is counteracted by equally strong pessimism from others.

Times are only going to get tougher for top brass, however, as corporate failures across the globe have brought to the fore the debate around executive accountability and remuneration. The debate revolves around the possible causes for corporate failure, a prominent suggestion being the gap between the expertise among the top brass and the direction in which firms are going.

One example of such a discrepancy is the fact that most businesses have digitalisation as their top priority, but their senior leadership lacks first-hand expertise in technology. Executive compensation has been in and out of the public lens over the years, which previously prompted the implementation of malus and clawback mechanisms that pertain to the withholding or withdrawal of executive bonuses. 

Number of companies listed on JSE, 2009-2018

A new report from Big Four accounting and advisory firm PwC recommends a new approach to executive benchmarking. Traditionally, executives are evaluated based on the market capitalisation of their firm – a metric that PwC suggests does not adequately reflect executive performance.

Instead, the firm advocates the establishment of a pay-range at the outset of an executive’s tenure, wherein the compensation fluctuates based on performance. Within the performance metrics, the firm recommends a number of benchmarks for the expertise demonstrated in the digital domain.

The biggest recommendation of the report comes in the form of implementing a “say on pay” approach within the company, which essentially entails voting on executive performance and compensation amongst all stakeholders involved in a firm. The principle is that compensation levels must be justifiable to everyone involved, which is not always the case.

In addition to keeping executive compensation in check, the say on pay approach also allows for greater gender parity at the highest levels of the business world – something that is considerably lacking as things stand. Voting on compensation will reduce pay differentials, making pay more fair and equitable.

Average say-on-pay support levels

The report conducted a survey amongst stakeholders in firms listed on the Johannesburg Stock Exchange (JSE) – a body of firms that has reduced in size over the last decade from 411 in 2009 to 359 this year, primarily due to amendments to the eligibility criteria for being listed.

Survey results revealed overwhelming support for say on pay mechanisms, albeit with a minuscule decline from support levels last year. Overall, 83% of JSE firms approve of say on pay, down from 84% last year, although this decline is mirrored among firms of large market capitalisation, wherein the support increased from 83% to 84% over the last year.

Support grew substantially amongst firms of mid-sized market capitalisation, up from 80% to 85%, while support amongst small market capitalisation firms grew from 83% to 86%. Support amongst micro market capitalisation firms fell from 82% to 81%.