Make CEOs cough up for poor performance

CEOs are paid silly money. Maybe they deserve it. They are the A-type kids who studied hard and had a cast-iron tolerance for risk.

With it comes the cosy corner office, countless perks, including their eye-watering pay cheques, and the prospect of seemingly endless riches courtesy of complex share rewards.

If they do their jobs well, and hit a sweet spot in the market cycle, there is very little financial downside to being a CEO — but perhaps it’s time they faced some of the downside risk faced by their shareholders.

Even shocking CEOs are paid a severance while shareholders run the risk of seeing an often meagre investment portfolio wiped out. Perhaps boards should be putting in a clause: “If your BHAG (big hairy audacious goal) bombs, you should pay back X% of your salary.”

As Sasol CEO David Constable steps down as the first foreign-born boss of the company, there is an argument that he be made to pay back some of the money. He was paid a globally competitive salary to run a South African-domiciled business and his North American BHAGs are far from glorious.

CEOs, especially those perceived to be globally marketable, are paid top dollar to work in South Africa.

Boards should expect a commensurate return on their investment.

Constable’s tenure has been far from outstanding. To be fair, commodity prices have plummeted during his time at the top, but project costs on his watch have overrun, leading to Monday’s profit warning that saw the share price fall more than 10% — its single biggest one-day slide since October 1998. Yet he gets to keep his R50-million, give or take, a year salary over five years and a post-tenure consultancy to boot.

This week the company warned in a trading statement that its Montney shale gas field was over budget and its cumulative losses to date are around $11.5-billion (about R170-billion).

At least outgoing Impala Platinum CEO Terence Goodlace had the decency to skip pay increases and bonuses at the firm for three years before chucking in the towel last month. Constable has made no such compromise.

Rather than get their collective knickers in a twist over the considerable potential upside for new Old Mutual CEO Bruce Hemphill, shareholders should be looking at protecting the downside. Hemphill, tasked with undoing the foibles of his predecessors, stands to cash in if he pulls it off. He is being paid a decent CEO salary of £900 000 (about R19.3-million) a year with up to 1 000% upside for perfect execution of the break-up of the business. Add value for shareholders and he will earn R200-million — with the only downside that he earns just the base salary.

So, what if boards did introduce a financial downside? Theoretically they would only get serious job-seekers. But what if things were going pear-shaped? The CEO might abandon the firm mid-crisis to limit their downside, or fiddle the numbers. A board could limit those risks by doing its job properly. After all, they are the members of the board who are supposed to exhibit oversight of the highly paid CEO and keep them in check.

The easiest way for boards to look after their shareholders is — rather than give directors options that reward upside — to oblige the boss to take a percentage of their cash salary, say 25% a month during their tenure, to actually buy shares in the company. They would only be allowed to realise that value arguably three to five years after handing over to their successor.

This would force the CEO to pursue longer-term, sustainable goals. It would force them to train their potential successor to do the same and encourage internal rather than external hires. Mostly, it would cost them cold hard cash if they got it wrong. Behavioural economics teaches us that we fear downside more than we appreciate upside.

Perhaps it’s time to turn the remuneration model upside down.

Whitfield is a jobbing journalist who does not begrudge high salaries for great performance