Short or long term?
Remuneration method the differentiator
IF YOU WERE IN a management position at one of South Africa’s two largest insurance companies last year, you would’ve wanted to head the winning one. But which one would that be? If the answer was to be found by looking at the remuneration bill of both Old Mutual and Sanlam, then the former was the clear winner.
Old Mutual’s executive remuneration bill increased by 134% to take CE Julian Roberts’s and finance director Philip Broadley’s salaries to a total £3,5m (R39,2m) in the year ended December.
Sanlam’s four executive directors were paid a total R49,3m, which was 24,6% up on the R39,6m they received in 2008. CE Johan van Zyl took home R10,7m, followed by finance director Kobus Möller with a distant R5,6m. Both sets of numbers increase to £4,7m and R58m when nonexecutives are included. Old Mutual has an 11-member board while its smaller rival boasts an 18-member board.
Many observers will be keen to know how the different sets of shareholders fared. For financial 2009, Old Mutual delivered a £118m loss, from a healthy profit of £683m (R7,6bn) the year before. That compares with Sanlam’s “core earnings” of R3,7bn, which was 4,65% lower than the R3,9bn it earned in the year ended December.
Given these statistics, shareholders noticed and voted with their feet over the past two years. At around the 2400c/share mark, Sanlam is nominally higher than its 2300c of early January 2008. Its limited global ambitions have turned out to be a blessing in disguise, as it has maintained a consistently superior performance to that of Old Mutual.
Due to its global exposure, Old Mutual suffered severely and, in the middle of the global economic recession, it hit a low of 454c/share last year before recovering to its current 1260c. This price is still 45% lower than its 2300c high of January 2008.
Why does it pay more to manage Old Mutual than it does to manage Sanlam?
Old Mutual says in its annual report it has for 2010 onwards introduced a new strategic direction for the group and with that it will introduce a new executive remuneration strategy. It said its remuneration review made it realise its current strategy “introduces a focus on short-term performance that the (remuneration) committee believes is now not consistent” with current trends in the financial services sector. The new strategy will do away with the short-term performance targets that amount to 25% of its executives’ salaries.
For the long term, Roberts and Broadley are required to buy shares under the company’s “two-for-one” incentive scheme. They receive a single bonus share for every two they buy. The total benefit amount is estimated at £576 000 for Roberts and £57 435 for Broadley.
Sanlam says its total guaranteed pay is set by reference to the median to upper quartile level paid by a group of comparative companies, which it considers to be appropriate. Sanlam’s incentive schemes are heavily biased towards long-term performance and shareholder alignment, where shares are awarded to executives at prevailing market prices but can be exercised over two-year intervals after the third anniversary of the award.
In addition to the 311 000 shares currently due to Van Zyl, a potential 300 000 shares will vest to him by 2014 if the group meets numerous performance targets.