Business News 8.11.2017 08:14 am

Highly-paid SOE execs are not accountable

CEO salaries’ need to be pegged to performance.

South African SOEs have been under the spotlight and in the news for the wrong reasons. Their prime purpose is said to be a developmental one, whereby they provide services to the country’s people, and play a pivotal role in the development of the economy.

What we are seeing however is far from that ideal. Many SOEs are poorly managed, are performing abysmally and are unable to deliver on their mandates. Some, like Eskom, SAA, the SABC and the Sapo are heavily indebted and are a burden on the fiscus.

Yet their CEOs are among the best-paid people in the country. Unlike in the private sector where suitable candidates are hired for the job, and held accountable by a board and sometimes by shareholders too, there appears to be very little performance management of these CEOs. So how do they justify their extraordinary salaries and the occasionally massive increases?

Moneyweb had a look at the salaries of the key SOEs and found some interesting things.

The former CEO of power-utility Eskom, Brian Molefe, was the highest paid CEO ever, during his 15 month tenure, when compared to CEOs of Transnet, Denel, SAA, Sapo and Acsa.

Read: ‘Eskom execs should pay back the bonus’

According to the group financial statements, Molefe received R9 467 000 in 2015/2016 and R8 871 000 remuneration for the 2016/2017 financial year, while employed by Eskom.

He was appointed as group chief executive on September 25 2015 at a salary that was at least three times higher than his predecessor, Tshediso Matona.

Some argue that he deserved this salary as he brought Eskom’s maintenance schedule up to date and put an end to load shedding. Others argue that load shedding declined as new power came on-stream and the economy stalled.

However under his watch group profit vacillated wildly, increasing by 42% in 2016 and declining by 82% to R888 million in 2017. Molefe stepped down in December 2016 after being named in a state capture report compiled by former public protector, Thuli Madonsela.

Activist shareholder, Theo Botha said that Eskom has performed badly in the sense that they haven’t addressed the fundamental issue, in terms of corruption, and somehow the internal control procedures have broken down.

Prior to Eskom, Molefe was the CEO at freight company, Transnet. He resigned from Transnet in September 2015 and according to Transnet’s 2015 financial results, received R6 678 000 remuneration. His move to Eskom thus earned him a 41% increase.

Molefe was succeeded by Siyabonga Gama at Transnet. Gama was appointed as acting Group CE, effective April 20 2015. His  remuneration in 2015/2016 was R 7 249 000, this was 9% more than Molefe’s remuneration in 2015, however as reflected in the 2016 financial results, Transnet’s profitability decreased by 93%.

According to Transnet’s remuneration structure, performance is recognised and rewarded and performance improvement is incentivised.

Botha said that CEO salaries are not necessarily linked to the CEO’s performance, and that it is not usual for SOEs to have  performance criteria. However, in cases where CEOs are paid extravagantly despite their entities’ involvement in corrupt dealings, it is important that someone is held to account.

“Nobody is blaming the CEO, but at the end of the day, it is the CEO’s ultimate responsibility, so why should the CEO then get an increase,” he said.

The CEO of state arms company Denel, Riaz Saloojee, has been with the company since 2012 and has enjoyed significant remuneration increases. His 2015/2016 salary rose by 13%, well above inflation, and his 2016/2017 salary jumped by 35% to  R6 407 000. Over this period – for the 2015 and 2016 financial years – group profitability declined.

Thus the figures are indirectly proportional to each other. Denel’s remuneration policy is set according to the individual’s performance and capped at a maximum monetary value, which is related to market remuneration per job level which no person may pass.

Botha said that other than CEOs taking accountability for their actions, board members are also expected to intervene.

“There’s only one entity that can really hold SOEs to account, that’s the board, because the board is appointed to hold executive directors to account and the board is appointed to ensure the company is well managed and the company produces the profit at the end of the year,” he said.

Additionally, board remuneration committees are also assigned to ensure fairness in remuneration payouts – not rubber stamp CEO directives. It is important then that members of the remuneration committee must have the necessary skill-set to fulfill this function.

“You can’t be giving a remuneration increase if they not performing,” he said.

Botha added that in addition to evaluations from board members, there should be independent people who evaluate. The board evaluates the executive directors and the staff and somebody should evaluate the board. In the case of JSE-listed companies it is the shareholders.

With SOEs that would be government. But that doesn’t happen.

The Auditor-General recently found that while airport management company Acsa is profitable (growing profits by 18% in 2016), it notched up a fortune of irregular spending. It had R1.169 billion in irregular spending in 2016, 60% of which was due to non-compliance with legislation.

At the same time, remuneration for its CEO, Bongani Maseko, increased by 43% in 2016 from R5 040 000 in 2015, as reported in the company’s financial results.

Maseko has come under fire in recent times for alleged corruption deals and tender irregularities. A report by legal firm Norton Rose Fulbright, confirms that action should be taken against Maseko pending a disciplinary hearing. The DA has written to the Transport Ministry to insist that Maseko is suspended immediately and the board resolved to follow actions against him, but this had not happened.

SAA and the Post Office have also slowed in the delivery of their mandates.

SAA is technically insolvent. Of the R19.1 billion loan guarantee facility from government, the airline has drawn R14.3 billion and continues to post losses.

The Sapo has a R4.4 billion facility, however it has a new board and CEO and it has raised funding that has enabled it to repay creditors and implement a turnaround plan.

One of the key measurements of performance of an SOE should be the debt, said Botha and whether this is increasing. Thus a CEO should be managed on their ability to get debt under control.

Botha said that another way to get CEOs motivated is to set a low basic.

“If he or she is on a very low basic, he takes the risk that he’s not going to earn a big salary; but then give him a great long-term incentive scheme, so if he does turn it around then he’s in the money.”

SAA recently appointed its first permanent CEO since 2015, Vuyani Jarana, who says he has plans to turn the company’s losses to profit by cutting costs, while the company still seeks more investors to revive its fortunes.

Read: Stemming SAA’s losses a priority, says Vuyani Jarana

The Sapo also incurred losses over the 2015 and 2016 financial periods. Among other reasons, worker strikes affected results over these years. The current CEO for Sapo, Mark Barnes, was appointed in January 2016. From the time of his appointment to the release of the period’s financial results, he received R538 000. This was an 82% decrease from his predecessor, CJ Hlenkane. He now earns a more modest (in comparison with other SOEs) R4 240 000 for the year.

Given the numbers and controversy surrounding these SOEs and their CEOs, it is time that accountability is taken and the CEOs perform in ways that positively impact South Africa’s economy, development and people’s lives.

Brought to you by Moneyweb 


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