Executive pay fever calms
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.”