Blinding us with science
SA executives of listed companies — unlike other employees — have managed to secure above-inflation increases in their guaranteed pay.
But, according to professional services firm PwC, where executives have really scored is in the increase in short-term incentives they have awarded themselves.
The average increase in total guaranteed package (TGP) of between 3% and 12% in 2015 is dwarfed by the 16%-69% increase in short-term incentives in the same year.
TGP is what executives get paid just for agreeing to work for the company. In its just-released annual report on remuneration practices and trends, PwC defines TGP as “that portion of remuneration that is paid regardless of company or employee performance”.
PwC tells us that in 2015 executive directors of JSElisted companies got increases of between 3% and 12%. CEOs in the largest companies got an average guaranteed package of R7.7m.
The worst value for money on the JSE last year was in the resources sector, where executives continued to enjoy increases in their TGP while shareholders lost significant value.
CEOs at the largest mining companies received R32.6m just for pitching up for work. At smaller mining companies CEOs got R18.3m.
But while the TGP is an important indicator of what remuneration committees believe is appropriate, it provides little indication of how much money senior executives are actually pocketing each year. Missing from PwC’s report (yet again) is any serious attempt to provide details of the value of short- and long-term incentives. PwC director Gerald Seegers acknowledges these incentives can be extremely valuable, estimating they can add between 30% and 200% to the TGP.
The report touches, briefly, on short-term incentives, but shies clear of the much more controversial long-term incentives other than to say they are “excluded since this is not only complicated to define but difficult to report on given the different schemes companies have implemented over the years.”
On the issue of short-term incentives, no absolute amounts are provided, but the percentage increases in 2015 (varying from 16% to 69%) suggest extreme levels of generosity.
Without details of the incentive packages, drawing any conclusions from PwC’s report would be misleading. It is worth remembering, perhaps, that the report is partly a marketing exercise for a firm that earns hefty fees from advising remuneration committees.
And as one of the largest advisers, PwC must take some of the blame for the increasing complexity of remuneration packages. This complexity makes it almost impossible to compare the packages awarded by different companies.
PwC adds insult to this injury by advising against the introduction of a binding vote on remuneration policies on the grounds that shareholders do not have a sufficiently firm grasp of the details to be able to take an informed decision. Before getting a binding vote, says PwC, “there needs to be a strong certainty that the shareholders who are given the right to vote are in a position to be able to critically analyse the remuneration policies and practices that they are expected to express a view on.”
Theo Botha, shareholder activist and outspoken critic of executive pay practices, says the real danger lies in the complexity of remuneration practices. Companies believe they avoid charges of not being transparent by providing screeds of information.
But this is so dense as to be inaccessible, says Botha. Instead of requiring shareholders, as PwC suggests, to become specialists, Botha recommends that companies be forced to simplify their remuneration systems.
He says it’s evident from his years of engagement at annual general meetings that few remuneration committee members have the sort of specialist knowledge that PwC alludes to.
Removing the complexity would not only make it easier for shareholders to understand but would also reduce the need for expensive advisers such as PwC.