How your boss’ salary is calculated differently to yours

Recent reports have highlighted the disparity in remuneration between CEOs and workers – and while commentators have called for greater regulation of those salaries and benefits, it is important to understand how remuneration is determined at various levels.

This is according to Dr Mark Bussin, exco member of the South African Reward Association (SARA), who said that an ill-conceived remuneration package can reward even an under-performing executive officer.

“These are the cases we see highlighted in the media. The perception that executives are overpaid is then generalised when, most often, their salaries are carefully formulated against industry norms.”

As a result, real or imagined, companies want to avoid any notion of biased remuneration. To this end, the King IV Report offers greater transparency by requiring executive remuneration reporting as a single total figure, said Bussin.

He noted how salaries are traditionally decided on at various positions across the company. This methodology will obviously differ from company to company but should give an idea of how remuneration is calculated at certain levels.

General workers

For general workers, a fair wage is decided through collective bargaining, striking a balance between what employers can afford and trade union negotiators are willing to accept.

“It’s notable that recent increases have been in the 7% to 8% range – higher than CEOs. Companies, aware of the pay gap, it seems, are trying to close it,” said Bussin.

Salaried staff

For salaried staff, various factors are considered, including salary surveys, inflation, education, personal performance, and the scarcity of an employee’s skills.

“Ultimately, the finance department budgets for an overall payroll increase in line with inflation, currently around 6%, said Bussin.

CEOs and directors

Executive salaries are more complex because CEOs and directors face much higher pressure than other employees, explained Bussin.

“Their track record for leading companies successfully in the face of overwhelming personal risk is why they’re engaged. As such, they command commensurate reward.”

They’re usually compensated in two ways – fixed pay and variable pay:

Under a fixed pay system, executive officers get a fixed salary that is mainly determined by benchmarking. This includes salary surveys and comparative studies of companies of similar size and complexity. Their pay in relation to these measurements will depend on the organisation’s remuneration policies.

Under a variable pay system, executive officers also receive short-term and long-term incentives. Short-term incentives are based on performance targets that, if achieved, usually result in a reward of between 50% to 100% of fixed annual salary. Long-term incentives, linked to company performance, are full shares and share appreciation – the value of the increase in share price.

According to Deloitte, shareholders in the past were only concerned about the adequacy and amount executives got paid – but now, they want to know if pay is justified in terms of company performance.

“In the last five years, and increasingly of late, there has been a great deal of media commentary on executive remuneration including specific coverage of the increasing number of companies receiving substantial votes against the remuneration report,” Deloitte said.

“Advisory votes on remuneration reports in the past may have seldom fallen below 50%, but the level of overall acceptance has certainly diminished, with many commentators and institutional shareholders vocal in their criticism, and votes in favour often sailing close to a 75% level.”

As such, the King IV Report on Corporate Governance for South Africa has a far more targeted approach to remuneration in the country – specifically requiring companies to explain why CEOs and other executives are earning what they are.

PwC’s ninth edition of ‘Executive Directors’ Remuneration and Practices’ report meanwhile, showed that executive pay continues to come under intense scrutiny from all angles, with mounting calls from institutional investors to reform executive remuneration.

Despite numerous initiatives been taken around transparency and better reporting, the gap between executive pay and the pay of the average employee continues to widen.

“It is almost certain that the current model of executive pay will be revisited,” the report’s author said.

‘Say on pay’ is gaining momentum in the wake of increasing demands for South Africa to move towards a binding vote on remuneration.

PwC noted that there is evidence of companies beginning to attend to the plight of the most poorly paid employees.

Read: The average salary in South Africa vs the world

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How your boss’ salary is calculated differently to yours