Regulating SA pay gap not the solution
ATTEMPTS to impose regulations or legislation to reduce the massive pay gap between CEOs and the lowest-paid earners in South African companies would be disastrous, according to Gerald Seegers, human resources services director at PwC.
Seegers presented PwC’s annual report on the trends in executive directors’ remuneration this week. The report showed that the total guaranteed pay package of a CEO of a JSE-listed company is 53.53 times that of the average income of the lowest band of employees. This does not take into account the bonuses and other incentives executives get, which could be up to twice that of the total guaranteed package.
Swiss citizens voted in a referendum in March to impose severe restrictions on executive compensation. Later this year, they will vote again on a proposal that the wages of an executive should be pegged at 12 times that of a company’s lowest-paid employee. An earlier poll by Isopublic showed that 49.5% of respondents in Switzerland were in favour of it.
In the US, the pay gap between the CEO of an S&P 500 company and the average lowest-paid worker is 204:1. In China, where CEO pay is relatively low, the gap is 20.32:1.
Seegers said the idea of government and regulatory intervention to ensure fairness was gaining traction globally.
“That will be extremely detrimental and I think companies should act first before that happens. We must start influencing corporates to say ‘take cognisance of your internal equity’.”
The problem with regulating a pay gap was that it was difficult to calculate and measure, because it could be based on various elements of pay, Seegers said. Such regulation could also lead to unintended consequences, such as executives simply opting for a smaller portion of guaranteed pay and getting more variable pay such as bonuses, he said.
The gap between what bosses get paid and what the lowest-paid workers in a company receive is a sensitive issue in South Africa, especially at a time when unions ask for increases of 60% to 100% and executives make headlines for all the zeroes in their pay packages.
There have been several suggestions on how to close this gap, but Seegers warned that increasing wages at once, or undertaking wealth redistribution — where an executive gives up his or her bonus to be distributed to low-income employees — were short-term fixes. Even if executives forewent their increases, as President Jacob Zuma called for last year after the Marikana tragedy, it would still only be a short-term solution, Seegers said.
On the issue of Zuma’s call, Martin Hopkins, partner in human resources services at PwC, said there had not really been a pay freeze for executives, but the increases for executive directors were lower than those of the management level below them, and so it went down the hierarchy. “There is a sensitivity to the pay gap, which is really what the president was articulating,” Hopkins said.
The PwC report shows that the median total guaranteed package for CEOs increased by 24% in 2011, but dropped by 13% in 2012. This does not mean that CEOs actually took a pay cut, but rather that new CEOs were paid less than their predecessors, or that pay packages were rearranged to include a smaller basic or guaranteed portion and a higher performance-related portion.
Loane Sharpe, labour economist at Adcorp, said South African companies should not be restrained in terms of their CEO remuneration increases, but companies should give appropriate increases to CEOs and other executives given the underlying performance of the company.
Sharpe said if productivity-related pay was extended to entry-level workers as well, workers would receive — and employers would readily pay — substantially higher wages.
However, Hopkins warned that too much variable or performance-related pay at the lowest level of a company could be problematic because many people live close to the breadline.
“If you get used to a certain level of pay because [the company] has a couple of good years and then it goes down significantly, you can’t be in a situation where you say: ‘Which child do I feed today?’
“The fat cats can say ‘Should I have one or two holiday homes?’, but at the breadline it is a problem,” Hopkins said.
Mike Schüssler, economist at Economists.co.za, said if everyone in a company shared in the gains of growth or increased productivity, they should also have to share the pain when that turns around. “That is what many people do not like about the variable part. The guy at the bottom should have a smaller variable part, because he needs more money to survive. He cannot take that cut. The guy at the top should have a bigger variable part, but he has a bigger role to play and his decisions make a bigger difference. But everybody should have skin in the game.”