Moaning about top dog pay ‘just so last season’
THERE is probably just one thing more tedious than people complaining about executive pay, and that is people who complain about people complaining about executive pay.
The sad reality is nothing has come of all this complaining, except perhaps that remuneration reports have become ever thicker and denser and more remuneration consultants are employed.
In the 14 years since companies were forced to disclose their top executive pay, it has become evident there is a positive correlation between complaining about executive pay and the size of executive pay packages. It’s rather like the seeming futility of complaining about political corruption: not only does it not seem to discourage corrupt activity, it might be encouraging it as borderline honest politicians are nudged over the line by the fear that if they don’t grab something soon, it will all be gone.
It’s in this context that we should be looking at Sovereign Food’s remuneration bonanza. At first blush, it looks like outof-control greed. But, in fact, it is delightfully subversive.
The Sovereign board is demonstrating just how much money can be gouged out of a company by playing the “remuneration game”. They do not stray from the rules of the game, but by playing them in an extreme form they highlight just how ridiculous executive pay has become.
A handful of Sovereign’s top executives awarded themselves R51-million worth of bonuses and incentives for their performance in financial 2015. If this was Anglo American or Astral Foods, it might look reasonable, but Sovereign is significantly smaller than either. The R51-million largesse reduced profit before tax from R160-million to R108-million. Sovereign’s revenue of R1.6-billion and employee numbers of 576 compare with Astral’s R9.6billion and 11 755.
What is particularly concerning is that the payout was only possible because the board changed the performance measurement goalposts, without informing the shareholders. It was changed from an ROE (return on equity) and Rona (return on net assets) basis to a profit margin comparative basis. Sovereign’s profit margin looked impressive compared with Astral’s in the chosen period. That chosen period (February 2015 for Sovereign and September 2014 for Astral) excluded, in Astral’s case, the considerable margin-enhancing benefits of the boom conditions experienced by the entire industry over the calendar year-end.
The generosity doesn’t end with bonuses. There’s also the plan to award the executives share appreciation rights equivalent to 17% of the company’s equity by March 2017.
Only the most determined of shareholders have been able to dig out the conditions attached to these rights, apparently intended to align the interests of the executive with those of the shareholders.
The Sovereign board believes all this is in order. It says it has to pay top packages or it won’t get the calibre of management needed to generate good returns for shareholders. One disgruntled shareholder points out that in the past six years the company hasn’t achieved any of its economic targets. The bizarre assumption seems to be that just by paying your executives more than your competitors you are assured the best performance.
The board says it has to pay more than Astral is paying or its executives will take up jobs elsewhere and, anyway, so what if Sovereign is much smaller than Astral — its executives are all putting in the same long hours of work.
These are all the classic remuneration arguments taken to their logical extreme. What could happen next is that Astral executives demand, rather reasonably, to be paid 10 times more than Sovereign executives. And the following year Sovereign will demand to be paid in line with Astral’s higher awards, and up and up it goes with nobody to stop it because the institutional shareholders think complaining about executive pay is tedious.