Short or long term?

Re­mu­ner­a­tion method the dif­fer­en­tia­tor

Finweek English Edition - - Companies&markets - SIKONATHI MANTSHANTSHA sikonathim@fin­

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.


Short term

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