Executive compensation corresponds directly with turnovers and earnings

26 November 2018 Consultancy.co.za 3 min. read

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.