Earning up to R10.56 million per year: are SA executives getting excessive pay?

The total guaranteed package for an executive in the telecommunications industry was R10.56 million per year in the previous financial year. The annual salary for a general worker earning the National Minimum Wage in 2023: about R52 873. Are executives in South Africa getting excessive pay?

The answer is not a simple one, says Laurence Grubb, master reward specialist and South African Reward Association executive committee member.

“The conflict surrounding executives’ pay in South Africa reflects a complex interplay of diverse interests among various stakeholders, including the media, general society, shareholders, government, executives themselves and boards with remuneration committees.”

According to PwC’s report on South African executive directors for 2023, the telecommunications industry offered the highest total guaranteed package for executive directors, followed by the consumer staples industry (R9.82 million), basic materials (R98.98 million), technology (7.91 million) consumer discretionary (R7.01 million), finance (R6.36 million), healthcare (R6.23 million), industrial (R5.85 million) energy (5,74 million) and real estate (4.45 million).

Grubb says the term “excessive pay” lacks a recognised definition and is susceptible to subjective interpretation.

“Excessive can therefore mean any figure. This is why it is important for companies to be transparent and provide the details of how they remunerate and what makes up the pay package, especially regarding the link to performance and the period related to the pay.”

He explains executive pay comprises guaranteed pay (base pay and benefits) and variable pay (short- and long- term incentives). Variable pay payouts are an indication that executives met or exceeded their performance targets.

“Therefore, it is imperative to be transparent when explaining significant pay components and whether they are for large base pay or performance-based incentives. Occasionally, buy-in packages and separation agreements inflate remuneration, but these payouts are anomalies and cause concern for shareholders.”

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Pay for performance?

Grubb says pay for performance is not limited to executives and research shows that high-performing companies have good performance management and link performance to remuneration.

“The principle-agent theory requires that the board ensures that the executive remuneration is aligned with the company strategy and objectives and aligns their interests with those of the stakeholders.”

This places the executive in a position to act in the best interests of the company and ensures that the company is managed in a sustainable and responsible manner that benefits all the stakeholders, he says.

“South African boards are tasked with taking care of all the stakeholders and not just the shareholders. If this is implemented properly, all stakeholders benefit from the decisions made by the board.”

What would the stakeholders prefer: executives that are perhaps overpaid and run the company successfully or a poor performing executive that destroys value and yet earn the right amount or less?

“Skilled executives are not a dime a dozen, especially not good ones. According to an article in Business Day, 41 executives resigned from their positions in companies listed on the JSE in the past 16 months.

“The South African market also noted a major increase in loss of skills due to emigration. Companies have to search outside South Africa to find executives with the required skills, global experience and track record and remuneration committees have to engage in benchmarking beyond the borders of South Africa to retain and attract executives.”

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Excessive restrictions on executives can cause loss of skills

Grubb warns that excessive restrictions or limitations on executive pay could increase the flight of skills and that would increase the talent shortage, which inadvertently drive the executive pay higher and even worse, companies might end up with executives who are unable to run companies successfully.

It is true that the wage gap is a major proponent of the issues surrounding “excessive pay”, Grubb says. “The proposed amendments to the Companies Act suggest more rigorous disclosure on executive pay and how it relates to the lowest wage earners in the company. The assumption is that these disclosures will ensure a stricter handle on executive pay.”

However, Grubb says, while these disclosures may lead to an increase in the wages of the lowest paid, it can inadvertently lead to outsourcing these lower paid positions all together.

“The wage gap is not the most significant issue that faces our country or economy. Unemployment is by far the greater evil. The pay gap is a private enterprise issue, while unemployed is the government’s responsibility. The most effective way to increase wages for the lowest level employees is to ensure they have the best education and skills and that requires a major change to our education system.”

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The role of good governance in executive pay

This is where governance lays a role. Grubb says a reputation of bad governance has serious implications for a company.

“Good governance requires a framework and process for ethical decision-making that is transparent and promotes accountability. The implementation of concepts such as a malus and claw-back policy, Minimum Shareholding Requirement (MSR), internal succession planning and share retention post-employment can contribute to effective governance in the scope of executive pay.”

In the US clawback is compulsory and not at the discretion of the board. Clawback is a contractual provision whereby money already paid to an employee must be returned to an employer or benefactor, sometimes with a penalty, according to Investopedia.

Grubb says the media also plays a pivotal role in shaping public perceptions of executives. “Sensationalism and exaggeration can distort reality, leading to the actions of a few perceived as the majority. It is important to navigate media portrayals with a balanced perspective. There is no doubt that poverty is a huge issue in South Africa but is this due to executive pay or poor education, corruption, poor economic policy and maladministration?”

Executive pay is nuanced and influenced by market and economic pressures, shareholder expectations, consumerism, globalisation and fierce competition, Grubb says.

“Understanding and addressing these dynamics are essential for fostering a balanced and effective executive remuneration structure. Adherence to governance structures, not just as a legislative requirement but as an ethical principle, must be linked to performance for transparent communication.”