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Tuesday, June 27, 2017
Bonuses, guaranteed increases among key issues explored in benchmark analysis spanning six years
Johannesburg, 26 June 2017: Increases to CEO guaranteed pay over the last five increase periods exceeded inflation by a considerable margin on a compound annual growth rate basis and annual cash bonuses paid to the CEO and CFO over the last six years are considerable in relation to guaranteed pay, with only 12% of instances where a bonus was not awarded to either the CEO or CFO over the last six years.
These are just two of several key issues identified in the Deloitte Executive Compensation Report, a detailed benchmark analysis of six years of top executive pay in relation to company performance and shareholder alignment amongst the JSE listed top 100 companies. The study was done in preparation for the implementation of King IV with the aim of contributing to the dialogue between boards and shareholders that it requires.
The King Committee published the King IV Report on Corporate Governance for South Africa (King IV) on 1 November 2016 and is effective in respect of financial years commencing on or after 1 April 2017.
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”.
Commenting of Deloitte’s reasons for undertaking the analysis and highlighting the key findings, Yuill said that with the implementation of King IV, there would be an even greater spotlight than in the past on the design, implementation, documentation, communication and disclosure of executive pay.
“Deloitte is of the view that stakeholders in South Africa require a balanced overview of the recent past to prepare for and inform the debate on the future. There is a need to establish a benchmark of the past and to provide a road map for the future to all stakeholders.”
These stakeholders include company executives and managers, with both internal and external consultants who take instruction from them; Boards with Remuneration Committees, advised by external and independent consultants; institutional shareholders; and the media and other commentators.
“The intention of this report is to inform the debate and the ensuing dialogue between companies and shareholders and to identify the major issues that all parties will face in the coming years,” Yuill said.
Over the next six months Deloitte will be releasing further reports that cover in more detail the concepts discussed in the report. These include alignment of executive reward to company performance and shareholder value creation, governance and shareholder views and disclosure, and guaranteed pay and performance variable pay concepts and disclosure.
To download a copy of the report, visit https://www2.deloitte.com/za/en/pages/human-capital/articles/executive-compensation-report.html
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