South Africa’s new company laws cut both ways

 ·31 Jul 2024

Listed companies and State-owned Entities now have to disclose the pay gap between their highest- and lowest-paid workers, which some say will have a positive impact, while others have flagged some major risks.

On Friday (26 July), President Cyril Ramaphosa signed amendments to the Companies Act of 2008 into law that promote the ease of doing business and impose greater corporate transparency.

The new legislation aims to increase corporate transparency by requiring public and state-owned companies to disclose the pay gap between their highest- and lowest-paid workers.

According to the amendments to the Companies Act, companies must report the earnings gap between the total pay of the top 5% highest-paid employees and the total pay of the bottom 5% lowest-paid workers.

The presidency said, “This remuneration report must be accompanied by the company’s remuneration policy and an implementation report.”

Speaking with eNCA, Etienne Vlok, the spokesperson for the South African Clothing & Textile Workers Union (Sactwu), welcomed the bill’s signing.

He argued that it would significantly improve the country’s current regime within companies.

He added that the Bill would help stem corruption by disclosing the beneficial owners of state companies and begin to address inequality by putting the wage gap in public view.

Vlok added that the disclosure law would benefit the work environment in several ways and put executives and remuneration committees on edge.

Firstly, Vlok explained that there would be less speculation in the workplace about the pay gap between the employees and the executive, which could be less than what the employees expected.

He added that another impact, and the most important, will be a cooling effect on the executive remuneration.

Vlok, this is good because, much like many major industries, executive pay is in the hundreds of millions of rands, which is a remuneration policy that doesn’t always align with performance.

Therefore, with pay now out in the open—along with the gap in pay—remuneration committees of boards and the executives themselves will have to consider that their pay can and will be compared to the rest of the industry.

Vlok believes this will rein in those companies that have ratios outside the norm, as it will spark questions from shareholders and workers alike.

The potential downside

Cliffe Dekker Hofmeyr’s Vivien Chaplin and Haafizah Khota caution that the new legislation may pressure companies to narrow the pay gap but could lead to unintended consequences.

Companies are unlikely to reduce executive pay but may outsource lower-level jobs, potentially resulting in fewer job opportunities and less stability for low-wage workers.

Khota explained by outsourcing low-level jobs like cleaning and security, a company can significantly increase the reported salaries of the bottom 5% of workers.

Additionally, the comparison of the top 5% of earners to the bottom 5% has been criticized as arbitrary.

The Palma ratio, which compares the bottom 40% to the top 10%, is considered more suitable for economies with many low-wage workers.

Despite these concerns, Vlok stated that the risks associated with the new laws are not new. He admitted that there is a risk with “unethical companies” outsourcing lower-paid work or cutting entry-level jobs.

However, he also mentioned that outsourcing and not retaining a workforce in a company could create problems for businesses.

Vlok argued that the new pay gap disclosure is beneficial to companies as it can result in higher productivity.

He also stated that shareholders should question directors’ actions if they want to conceal their high remuneration to the detriment of a company.


Read: New laws for schools in South Africa – Ramaphosa’s big dilemma

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