Dark clouds gather for lower-paid employees in South Africa
South African President Cyril Ramaphosa signed amendments to the country’s Companies Act, which poses a significant risk to lower-paid employees as businesses look for ways to report higher earnings for these workers without impacting their profits.
This means that companies could cut lower-paying positions and their workers or pursue increased levels of outsourcing to circumvent the new laws. This would result in an unstable job environment and fewer opportunities for entry-level work.
One aim of the new legislation is to impose greater corporate transparency on the earnings gap between a company’s highest and lowest-paid employees.
The amendments to the Companies Act force public and state-owned companies to disclose the pay gap between their highest- and lowest-paid workers.
Companies must disclose the earnings gap between the total pay of the top 5% highest paid employees and the total of the bottom 5% lowest paid workers.
“This remuneration report must be accompanied by the company’s remuneration policy and an implementation report,” The Presidency said.
These reports must set out details on the total remuneration received by each director and prescribed officer.
It should also include the total remuneration for the employee, with the highest and lowest total remuneration.
“Among other indicators, companies must report the average and median total remuneration of all employees,” it said.
Public and state-owned companies are now required to prepare and present a remuneration policy for shareholder approval.
The new rules aim to address the high levels of inequality in South African society. However, it may not work out as expected.
Cliffe Dekker Hofmeyr’s Vivien Chaplin and Haafizah Khota warned that the new legislation has risks for lower-paid employees.
While it aims to address issues of inequality and enhance transparency, several challenges and unintended consequences must be considered.
Pay-gap disclosures will put pressure on companies with a high disparity to rectify the situation and reduce the gap.
These companies are unlikely to cut executive pay. Instead, they will look to report higher pay for the lower-paid employees.
This does not mean that the salaries of these employees will be increased to the detriment of profits. It can take many forms.
It may inadvertently encourage executives to seek opportunities in foreign jurisdictions with more favourable remuneration policies.
They will also consider reducing the pay gap through workforce reduction or outsourcing. This is already happening at many companies.
By outsourcing low-level jobs like cleaning and security, a company can significantly increase the reported salaries of the bottom 5% of workers.
Lower-level employees, who are already struggling with comparatively low wages, may face job losses or reduced opportunities.
So, instead of increasing the salary of lower-level workers, it can result in fewer jobs and less stability for such workers.
Another criticism is that comparing the top 5% of earners to the bottom 5% of earners appears to be an arbitrary selection.
The Palma ratio, which compares the bottom 40% of earners with the top-paid 10%, has been touted as a better alternative.
This is because the Palma ratio is more appropriate for a developing economy with many low-level workers, like South Africa.
The Southern African Clothing and Textile Workers’ Union (SACTWU) national industrial policy officer, Etienne Vlok, said 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 cut entry-level jobs.
However, he said outsourcing and not keeping a workforce in a company created problems for businesses.
“If directors want to hide their high remuneration to the detriment of a company, shareholders should question their actions,” he said.
Vlok argued that the new pay gap disclosure is beneficial to companies as it can result in higher productivity.
Read: Ramaphosa signs big change for companies in South Africa
Loading ...
