For proudly capitalist South Africans
21 October 2014 02:22 (South Africa)
Opinionista Johann Redelinghuys

Executive salaries are determined by supply and demand. It's not a conspiracy

  • Johann Redelinghuys
Cosatu spokesman Patrick Craven has described executive salaries as “outrageous” and “unfair.” He says Cosatu is calling on the private sector to improve the welfare of “general workers” who, it is said, are living in “abject poverty”. What Craven and the rest of them fail to understand is that there is a market out there which operates like any other market and is regulated by supply and demand.

All over the world there is a short supply of people like Marius Kloppers, Whitey Basson, Stephen Koseff, Jacko Maree and Graham Mackay, among others. They create employment for thousands and carry the responsibility for making a profit in companies with assets worth billions of dollars. They sometimes have to turn unprofitable companies around, and if they fail, they get ditched. There is great demand for people who can do what they have to do. On the other hand the world is full of the “general workers” who depend for their wellbeing on these job-creators and big business risk takers. There are so many people in Cosatu’s “general worker” category that the world has a major unemployment problem with them.

The supply-and-demand-model is not rocket science.

Top quality CEOs can make a living anywhere they choose.

We only have to look at in our own backyard at what happens to perfectly viable companies when the reins are given to people who are not up to the job. Good leadership is a scarce resource.

Does Craven also think that other international commodity markets like oil or gold, which are regulated by supply and demand, are “unfair”? 

The frequent media outbursts about executive compensation may seem to suggest that there is an executive compensation conspiracy operating in the market. They think that somehow the fat cats get together and decide to give themselves the big bucks, and then undercut the people who are in the lower ranges of the employment chain, the “real workers”. Feeding into this is the belief that the workers are the exploited victims of an evil system, and that they are “entitled” to a better life. It is this never-ending sense of entitlement and dissatisfaction that is driving the endless toy-toying protests.

Remember that when a CEO is appointed, and a compensation package is agreed, a proper negotiation takes place and no one holds a gun to the head of the company. In a listed business there is usually a nomination committee or some other committee of the board which oversees the appointment process. They are not forced to do anything they would choose not to do, and these days the whole thing is subject to the transparent scrutiny of the board. Boards usually have a remuneration committee which has to lay its compensation practices on the table at the AGM for any stakeholder who wants to respond to them.

The most common “package” consists of a base salary, a bonus based on performance and some form of share participation. When Cosatu sees the big numbers, it is usually when a CEO has increased the value of the company, and benefits from a pay-out of the value of the shares on top of the basic salary and performance bonus. Cosatu members need to be reminded that all this is in accordance with international governance standards.

Adcorp’s new quarterly “Labour Market Navigator” claims to have a formula where a CEOs salary is evaluated in relation to the company’s financial performance of the last year. But some companies may take several years to be turned around or may decide in one year to focus on sustainability instead of financial performance. Should the CEO then be penalised? Of course there should be an element of compensation based on performance but this radical method of evaluating performance sounds as if it needs some careful further thinking.

Yes, there is greed, and we only have to listen to the damning comments of someone like ex-South African Greg Smith, who recently blew the whistle on what he described as “the corrupt practices” of the partners of Goldman Sachs, to know that some people exploit their companies and abuse clients. But the ethics and moral conduct relating to outright corruption are a different issue to the executive compensation which has been agreed by the board.

Cosatu’s outrage and its silly egalitarian argument pointing to the “unfairness” of some people earning huge amounts of money and others not, suggest a one-sided understanding. Why then must some people live in big houses and others not? Or why must some drive fancy cars and others not? Is the SACP contingent in Cosatu having difficulty with the fact that we live in a meritocratic capitalist democracy? It’s interesting to see how many ardent trade unionists, which used to be on the side of the workers, become big-spending, high-living capitalists when the “tender-entrepreneur” opportunities present themselves.

We know, to be fair, that this is not only a South African issue. Our partner in New York says: “Over the past three decades executive pay has risen dramatically beyond the rising levels of an average workers wage”. But again, the key factor is the supply and demand in the market. We could easily say that in the past three decades, the number of average workers has increased substantially and the number of top-level executives has not.

QED?

DM


  • Johann Redelinghuys
JohanRedelinghuysBW

Johann Redelinghuys is a partner at Heidrick & Struggles the international leadership consulting business, which bought the firm Redelinghuys & Partners of which he was the founder. He has been deeply involved in career management and executive search all his life. He is the chairman of the South African company and now heads up its board practice working with chairmen and CEOs focussed on CEO succession, strategic leadership review and board evaluation.

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