One aspect of social inequality is income inequality, which can reach extreme levels and materially jeopardise societal and market stability. Investors in the South African economy will have direct experience of this. South Africa’s extreme wealth and income inequality should be a worry to all South Africans, particularly financial actors with an interest in the long-term stability of society.
Within the public market context, resolving for equitable reward across shareholders, executives and labourers is an issue that has had different remedies, some with more success than others. Take for example the well-intentioned efforts in the US, which, in 2003, required public disclosure on executive pay, premised on the idea that sunlight is the best disinfectant. Yet this has done nothing to curb growing wage gaps and, in fact, there is now a body of research that suggests that simple public disclosure has in part precipitated an upward spiral of executive salaries in the US.
Curiously, it was the UK’s response to the Global Financial Crisis that advanced market practice on executive remuneration policy. The UK Government appointed Professor Kay to look at the extent to which markets are working in the best long-term interest of savers. The outcome of his work was the 2013 regulation requiring UK listed companies to submit their remuneration policy to a binding shareholder vote once every three years, along with an annual non-binding shareholder vote on application of the remuneration policy. Similar regulations exist in European markets such as Denmark, Netherlands, Sweden and Norway, which all provide for a binding shareholder vote on executive pay policies.
A variation of the same theme is found in the Australian market where the ‘two-strike rule’ is enforced. The rule holds directors accountable for executive salaries and bonuses by requiring directors to stand for re-election if a remuneration report is not passed by 75% of shareholders at the company’s annual general meeting for two years in a row.
The situation in South Africa has shifted over time, albeit at a slow pace – our own King CodeTM has long recognised the importance of remuneration in responsible corporate citizenship. However, it was only in the most recent version of the Code that the concept of fair and responsible executive remuneration, regarding overall employee remuneration, was introduced. The latest version of the Code also introduced the concept of mandatory engagement and commitment to changing remuneration practises if more than 25% of shareholders voted against the company’s remuneration policy, its implementation report or both.
Notwithstanding the introduction of these recent positive steps, the key issue left unaddressed is that shareholders of South African listed companies still only have a non-binding vote on all aspects of executive remuneration.
For the 2020 proxy voting season, some 16 JSE-listed companies had more than a 25% vote against their remuneration policy, and a further 26 JSE-listed companies had votes of more than 25% cast against their remuneration implementation reports. As investors express their views on remuneration more clearly there will be growing demand for transparency on remuneration data. One important aspect of assessing “fair and responsible” remuneration in the context of South Africa’s inequality challenge is the quantum of pay.
Prime broker, Peresec, has carried out some work on in-company inequality in the local economy. They found that CEOs of the JSE’s top 100 companies earned 56-times the single-year cash remuneration of their average employees in 2014, and this grew to 103-times in 2017 before subsequently moderating to 48-times in 2020, with the negative impact of the pandemic on CEO short-term incentives (see figure 1).
During the period, some CEOs earned as much as 1,500-times their average employees in single-year cash remuneration. In other words, for much of the last seven years, CEOs earned more in any single year than the average employees in their companies would have earned in their entire lifetimes, even before considering long-term incentives.
As striking as these numbers are, calculating them required resorting to a relatively crude process of extracting disclosures around staff costs and headcount from company reporting. This type of imprecision in data for both the numerators and the denominator inhibits the ability of investors to make a clear assessment of “fairness” of pay difficult.
Addressing this could potentially be achieved by mandating specific disclosures of inequality data. Most critically, disclosure of single-figure total remuneration data of executives (and anonymized disclosure for the highest-paid employee should they not be a group executive) could be mandatory for all public companies. Secondly, disclosure could also be made of the total remuneration of the lowest-paid permanent employee as well as the lowest-paid temporary employee. Thirdly, disclosure of the remuneration multiple between the top and bottom decile of earners could provide visibility of internal wage gaps. All this data exists within companies and is certainly relevant to both society and investors.
The inevitable introduction of ‘say on pay’ legislation should come as no surprise to executives of JSE-listed companies, especially given the international trends and the very real income inequalities that exist in South Africa. The provision of regulation to facilitate greater shareholders’ ‘say on pay’ would be an important step in closing the accountability loop between beneficiaries, asset owners, investors and the market, and it enables us to further deliver on our commitment to responsible investment practices. However, the exact nature of any ‘say on pay’ regulation would need careful consideration and should be coupled with an equally vigorous debate on regulation and policy related to job creation. BM
This article was written by Jon Duncan (Head of Responsible Investment), Robert Lewenson, (Head of Stewardship) at Old Mutual Investment Group, and Waseem Thokan, Head of Research at Peresec Prime Brokers