Professional services firm, Deloitte’s inaugural Executive Remuneration Report explores how executive salaries have increased over the past few years relative to company performance, and value given to shareholders.
Over the past five years, executive compensation has come under increasing scrutiny both locally and internationally, with shareholders now looking for deeper understanding and disclosure on how company executives get compensated.
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.
What CEO’s earn vs performance
Analysing the top 100 listed companies on the JSE, Deloitte found that the average executive in South Africa earns R17.972 million a year in total compensation.
An index of executive pay (TAC) versus a company’s performance – turnover, headline earnings (HE) – shows that, over the last five financial years, executives salaries have increased despite a poorer performance on a company level.
However, when taking the creation of shareholder value (SV) into account, executive pay tends to be on par – if slightly above.
An index of CEO compensation alone shows growth of 167% (under-performing shareholder value), but with the CFO compensation included (top two executives) this rises to 177% – meaning that CFOs are ‘less penalised’ by a declining growth in earnings, Deloitte said.
Pay versus performance also varies by industry, as the graphs below show.
MRC: Mining, Construction and Resources.
IAM: Industrial and Manufacturing.
CTT: Commercial, trading and Technology.
FPI: Financial, Property and Investment Services.
Financial, Property and Investment Services
Commercial, Trading and Technology
Industrial and Manufacturing
Mining, Construction and Resources
According to Deloitte’s findings, the biggest discrepancy is seen in the Mining, Construction and Resources sector, which has been hit hard over the past few years by external and global factors.
Despite effectively destroying shareholder value and halving company value – executive compensation in the MRC sector has barely been impacted.
“Shareholder and company misfortune has not correlated with executive pay. One could conclude from this that alignment of top executive pay to either shareholder value or company performance is not emphatic,” Deloitte said.
“Whether or not alignment with shareholder value and company performance should be the ultimate or only determinant of reward is a moot point. However, it should no doubt prevail as a major influence on top executive pay.
“Whether or not the consistently large bonuses generally paid out have been warranted is however another matter for consideration,” the group said.