Disconnect reward from extraneous factors

As a general principle, we must assume that company boards, representing as they do the shareholders, will not pay executives any more than they have to. That said, some remuneration packages do look excessive, especially those where one year’s reward for the CEO is more than most of his employees can dream of earning in a lifetime.

However, as the executive search consultants continually remind us, there is a market operating here. Yet common sense should tell remuneration committees that executives cannot be rewarded (or punished) for things over which they, by definition, have no control. If the profits and earnings are boosted (or reduced) by a weak rand or a high gold price, or both, it should be easy enough to exclude that from the calculation. Sasol’s recent executive bonus decision looks particularly egregious in this respect.

And the prospect of a bonus for exceptional performance should be balanced by the spectre of a reduced package for underperformance (though in some companies the penalty for that is worse — dismissal).

There is a new mood of shareholder activism and it is to be warmly welcomed. The Public Investment Corp, the biggest investor on the JSE, has several times voiced its displeasure at the packages being granted to CEOs in particular. It is right that boards are called to account at AGMs to explain their thinking, and they would be wise to engage more frequently and deeply with shareholders. Shareholders, for their part, need to ensure that they understand in detail the market factors that govern contracts — and the difficulties in finding the right men and women to run massive and complex global companies.

The gap between the highest- and lowest-paid employees is not the point. The point is, are employees at all levels doing their work as provided for in their agreement with the companies? If so, any reward beyond that contract needs to be justified, with an explicit disconnection to extraneous factors.