Right way to limit CEO pay
AT SA’S LARGEST COMPANIES, BOSSES EARN 93 TIMES THE AVERAGE WORKER Pay should be linked to financial results, social and environmental measures.
CEO pay has become a controversial topic in recent times. The wage gap, which refers to the number of times a CEO earns relative to the general worker, has grown every year for the last 20 years. If we consider the total earnings of CEOs (guaranteed pay plus variable pay) the wage gap of the largest organisations in South Africa is about 93, which means that the CEO earns 93 times more than the general worker. According to Forbes, CEOs in America earned 335 times more than the typical employee.
The Wall Street Journal has an article by Will Harmon punting a formula for CEO total earnings, which uses combinations of the net income that the company made, as well as market cap. This intuitively has some logic behind it in that the first amount of money that the company made is used to base the CEO pay and then it is adjusted up for the company size.
Harmon believes the formula is a good indicator for the US market: Maximum CEO compensation = 0.5% * net income + 0.03% * market cap)
We have tested this formula on both the JSE Top 40 listed companies and the Top 100 listed companies and it produced some interesting results: 60% 109% 197%.
This means that at the median (or 50th 25th 41% percentile), South Africa pays its CEOs 35% less than the formula maximum for Top 40 companies and 9% more than the formula maximum for Top 100 companies.
This calculated figure is meant to be a maximum, which indicates that a large percentage of CEOs earn above this maximum. This appears to fly in the face of our more conservative wage gap relative to the US and we posit that CEO pay is far too complex to ascribe to two financial factors. There are many other elements to CEO performativity that contribute to the levels of pay.
The world is moving away from mere financial measures to gauge both sustainable performance of organisations and CEO pay. It makes sense that CEO pay should be linked to truly sustainable organisational performance that is based on financial results, social and environmental measures.
We may not be able to design a pragmatic formula to limit CEO pay sensibly, but the stakeholders know intuitively when pay is out of line with sustainable performance. Stakeholders will continue to use channels to influence pay practices so remuneration committees and boards cannot ignore the societal pressures bearing down on them.
Bryden Morton is executive director and Chris Blair is CEO at 21st Century.