Ex­ec­u­tive pay fever calms

See­ing sense

Finweek English Edition - - Money Clinic - BRUCE WHIT­FIELD brucew@fin­week.co.za

A SMALL but grow­ing num­ber of South African listed com­pa­nies are mod­er­at­ing their short-term in­cen­tive schemes: not be­cause of any al­tru­is­tic con­cerns for lower paid staff but rather due to the im­pact of the global eco­nomic slow­down. “Around 10% of top com­pa­nies are look­ing at cap­ping short-term in­cen­tives,” says Martin West­cott, MD of P-E Cor­po­rate Ser­vices, a con­sul­tancy spe­cial­is­ing in ex­ec­u­tive re­mu­ner­a­tion. “There are im­per­fec­tions in ex­ist­ing schemes, and com­pa­nies are start­ing to ac­knowl­edge that.”

While com­pa­nies were re­port­ing 30% plus earn­ings growth, share­hold­ers were happy to rat­ify higher than av­er­age in­creases in ex­ec­u­tive pay pack­ets. Now that the growth tra­jec­tory is less cer­tain, more firms are again pay­ing at­ten­tion to the ba­sics.

“There’s an el­e­ment of san­ity re­turn­ing to re­mu­ner­a­tion in SA,” says Deloitte ex­ec­u­tive re­mu­ner­a­tion ex­pert Nick Icely, who says ex­ec­u­tives who might have eas­ily upped and left SA to pur­sue bet­ter earn­ings op­por­tu­ni­ties over the past decade will find it harder to do so now.

But there’s no quick and easy so­lu­tion to the do­mes­tic wage gap and de­spite in­creas­ingly vo­cal union de­mands it’s un­likely to be mean­ing­fully nar­rowed in a hurry. The wage gap in SA is among the high­est in the world. Just last year SA passed Brazil in terms of the Gini co­ef­fi­cient: a mea­sure that pur­ports to gauge the gap be­tween the high­est and low­est paid work­ers in an econ­omy. That gap was high­lighted in a re­port last year by UCT eco­nom­ics Pro­fes­sor Ha­roon Bho­rat. He claimed SA had be­come the world’s most un­equal so­ci­ety.

The Gini co­ef­fi­cient is a num­ber be­tween 0 and 1, where 0 equals per­fect in­come equal­ity. Con­versely, a score of 1 would in­di­cate per­fect in­equal­ity. SA’s num­ber comes in at 0,67%. Govern­ment plays down the sig­nif­i­cance of the mea­sure, based on it not be­ing a suf­fi­cient mea­sure of over­all so­ci­etal well-be­ing. SA has 13m peo­ple who re­ceive so­cial grants that aren’t used in the mea­sure’s cal­cu­la­tion.

That aside, grow­ing so­cial un­rest and mount­ing in­dus­trial ac­tion point to grow­ing dis­sat­is­fac­tion over the gap be­tween those who are best paid and those at the bot­tom rung of the in­come spec­trum.

Pre­cise num­bers are hard to come by and some stud­ies are quoted for dra­matic ef­fect. For ex­am­ple, Labour Re­search Ser­vices (LRS) re­ports it can take up to 330 years for a low-in­come worker to earn as much as the CEO of a large com­pany in a year.

Stud­ies such as that il­lus­trate ex­tremes, but P-E Cor­po­rate Ser­vices’ West­cott says the trends have moved in favour of se­nior ex­ec­u­tives over re­cent years. When he be­gan study­ing re­mu­ner­a­tion trends 15 years ago, he noted the gap be­tween the salary of the CEO of an in­ter­me­di­ate firm was 35/1: that gap in a com­pa­ra­ble firm has now swollen to 57 times.

LRS says the av­er­age CEO earned 14% more last year; non-ex­ecs got a 15% kicker; while the av­er­age low-wage worker re­ceived around 10%. Most white col­lar work­ers in full time em­ploy­ment in 2009 would have con­sid­ered them­selves for­tu­nate to get 6%.

Union wage de­mands in the cur­rent ne­go­ti­a­tions sea­son have been un­usu­ally high. The im­pact of the global fi­nan­cial cri­sis and the un­cer­tainty sur­round­ing the state of the econ­omy are driv­ing unions to make in­creas­ingly higher de­mands. That in an econ­omy that shed close to 1m jobs over the past 16 months.

Says Icely: “There’s no im­me­di­ate so­lu­tion to the wage gap, but the ex­trem­i­ties are be­ing re­duced by the fact that the earn­ings po­ten­tial of com­pa­nies is more muted than it was pre­vi­ously.”

MARTIN WEST­COTT

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