Nothing makes my blood boil more than the topic of executive pay. I’m talking specifically about the massive amounts of money that CEO’s of large listed corporates in South Africa get paid each year.
Besides contributing massively towards income inequality in the country, it’s potentially value destructive for shareholders in many cases.
Here are the major gripes I have around CEO pay.
1. Its completely out of whack compared to the salaries of regular employees
According to PricewaterhouseCoopers 11th edition of the Executive directors: Practices and remuneration trends report, CEOs of South Africa’s top companies earned a median of R5.4m in 2018, up from R5.2m in 2017.
What concerns me even more is that the annual earnings of CEO’s from the 10 biggest companies listed on the JSE averaged just under R24 million last year. In contrast, according to Stats SA, average monthly earnings paid to employees in the formal non-agricultural sector was R238,300 a year in 2018.
This means that CEOs of the top 10 companies on the JSE earn 100x more than the average South African worker.
The situation is even worse in the US. The CEO-to-worker pay ratio reached 312-to-1 in 2017. This was up from 20-to-1 in 1965 and 30-to-1 in 1978.
You simply cannot convince me that any one person can justify being paid hundreds of times more than anyone else in a company.
I can safely say that this situation does not exist in most owner managed businesses – certainly not to this extent. In my own business, I never paid myself more than five or six times the average salary of my employees. Even then, I had some guilt issues about it. I knew that while I was an extremely valuable part of the company, everybody played an important role in their own right towards ensuring our success. In addition, there were many years when I paid bonuses to staff, while foregoing one myself.
2. Levels of CEO pay are not always based on performance
According to a 2019 report “Reining in CEO compensation and curbing the rise of inequality” by Baker, Bivens and Schieder, increasing CEO pay is not actually linked to an increase in the value of CEO’s work; instead it is more likely to reflect CEO’s close ties with the corporate board members who set their pay.
In other words, the ability to kiss arse can be a major attribute towards ensuring a bigger paycheck – not exactly aligned to shareholders interests, is it?
In this regard, the report goes on says that while corporate boards technically report to shareholders, shareholders are not particularly well positioned to put pressure on directors to restrain CEO pay.
A good example of pay not exactly being linked to performance came this week, with the news that Woolworths CEO, Ian Moir, has earned a total R191 million in the past five years. During this period, the group’s market capitalisation reduced by R36 billion to R51 billion as at 30 June. I don’t know about you, but if I’d be pretty pissed about this situation if I was a Woolworths teller working my butt off 10 hours a day for minimal wage.
It’s not just Woolworths though. Similar situations prevail at York Timbers, Grand Parade and Sasol right now. There have been countless more examples over the years.
3. Beware the stock options
Besides the generous monthly pay-checks that CEO’s receive, they are also often the recipients of huge amounts of stock options or other share incentive schemes.
It’s the ultimate misdirection that would make even the best magician proud. While we are all focused on the salary component of CEO pay, we often miss the real kicker – share-based incentive schemes.
For example, Naspers CEO Bob van Dijk received the equivalent of about R180-million in base pay, pension and incentives in the 2019 financial year. While that may be a ton of cash in itself, the real gravy for van Dijk came in the form of more than 290 000 Naspers N share options, which became vested to him with a release value of R955.4-million. Roughly R780 million worth of share-appreciation rights also vested, for a total of more than R1.7-billion.
I mean, come on………I know that Naspers continues to do well, but that’s mostly due to its somewhat fortunate investment in tencent, which van Dijk was not even responsible for (the initial investment took place as far back as 2001, way before he joined the company in 2013).
Similarly, MTN Group CEO Rob Shuter, who only joined the company in March 2017, was awarded 436,600 shares worth R38.3 million in 2018. That’s just ridiculous.
Which brings me to my final point
4. The risk is not commensurate with the reward
In a capitalist environment, there is inherently a direct correlation between risk and reward. The more risk someone is willing to take on, the more they should be rewarded for it.
That’s why someone who works as a deep sea oil rig diver earns significantly more than someone who cuts grass.
So why then do corporate CEOs, who have zero skin in the game, feel that they are entitled to earn more than an entrepreneur who has staked his whole future on his enterprise? Any business person will tell you, the first ten years of a business are the hardest and a time when a company is most likely to fail. In contrast, established businesses rarely go bust and even able to thrive for long periods of time on momentum alone.
That’s why I feel slightly differently about the remuneration levels of corporate CEOs who were also the founders and have been responsible for the company’s success – people like Adrian Gore, Brian Joffee or the Firstrand founders. Those guys deserve every penny they get paid.
But people like van Dijk, who inherited an empire at a stage where he would actually have to try his hardest to cock it up do not deserve R1.9 billion per year.
So what’s the solution?
We can start by shaking up the boys club environment that exists between CEOs and remuneration panels. Putting some low-level employees on these panels should help in getting a more realistic view on a CEO’s value.
Next, we need to find a better way for shareholders to be more involved in executive remuneration decisions.
While some asset managers are quite active in these matters, far too many are way too passive when it comes to voting against excessive pay packages. As clients, we need to hold them responsible for representing our interests in this regard.
As shareholders, we also need to make our own voices heard, no matter how small they may be. Lets be more vigilant about finding out what the CEOs of the companies that we invest in are being paid and use the power of social media to express our concerns.
Finally, companies should not let themselves be held ransom to the argument from CEOs that they are international talent and should therefore have their remuneration packages benchmarked with those of CEOs from countries like the UK and US.
South Africa is not the UK or the US. A Woolworths cashier does not have his salary benchmarked with a US counterpart – so why should the CEO? If CEO’s are not happy with that, they should head off to the US or UK and prove that they are indeed international talent – and endure the high cost of living that goes along with it.