Something’s got to give on CEO pay
Brand Pretorius got Absa to give its CEO R28m, but escalating salaries trouble him,
THE man who awarded Absa CEO Maria Ramos R28-million in salary last year says the current levels of executive remuneration make him uncomfortable and are difficult to justify.
The salary paid to Ramos was controversial for a number of reasons, not least of which was the fact that during this period Absa was outperformed by all the other banks and shed market share.
Shareholders were not amused and 18.4% rejected Absa’s remuneration policy at last week’s annual general meeting — an impressively high number considering that 63% of its shares are owned by parent company Barclays, which supported the policy.
At the centre of the controversy is Brand Pretorius, former CEO of the McCarthy motor retail group and chairman of Absa’s remuneration committee for the past four years.
I personally do not think it is sustainable, because it is not just a business issue anymore. It has become a really important and sensitive social issue
Pretorius has long been regarded as one of the nice guys of South African business.
But Absa has taken so much heat over its remuneration policy that the affable and always punctiliously polite Pretorius makes it clear at the start of our interview that he can only talk about executive remuneration in general terms. He will not be able to answer any questions about Absa specifically, he says.
To do that, of course, would require permission from the bank’s chair- woman, Wendy Lucas Bull. This is unlikely to be forthcoming.
Alright, then, in general terms, does he feel that R28-million is excessive?
“From a moral point of view, considering the situation in South Africa, it is very high.” Yes, but is it excessive? “These people earning these massive packages,” he says — presumably meaning, but being at pains not to say, executives such as Ramos and the two Standard Bank CEOs who were recently awarded R28-million each for their nine months at the top — “may have 40 000 employees and the responsibility to look after 1 200 branches.”
In other words, they’re doing their jobs. But are they being paid excessively for that?
“In my heart I feel uncomfortable. If you look at these amounts in relative terms, they are very difficult to justify.” But not impossible? “As a remuneration committee, you would be doing your shareholders a grave disservice should you now adopt a very moral stance, cut executive pay drastically and end up with an organisation that perhaps won’t have the quality of leadership team in place to take the company forward.”
This is a favourite argument. But the question is, how can shareholders properly assess the quality of leadership if companies do not disclose their key performance indicators?
Veteran shareholder activist Theo Botha takes issue with this point specifically. “We don’t know what these key performance indicators are, so we cannot hold companies and directors to account,” he says.
But Pretorius says there are limits to what banks can disclose.
“I am not aware of one bank that is disclosing individual performance targets and achievements against those targets and the exact formula used to determine bonuses. That sort of information, from a commercial point of view, is very sensitive.”
But Pretorius agrees that if that
Shareholders need to respect the need for confidentiality’ — on why Absa won’t disclose the performance criteria for its executive salaries From a moral point of view, considering the situation in South Africa, it is very high’ — on whether paying a CEO R28m, such as Absa paid Maria Ramos, is excessive
information is withheld, shareholders cannot properly interrogate remuneration decisions.
“It is a very, very difficult thing,” says Pretorius, “because you can’t take discretion out of the equation. Shareholders need to respect the need for confidentiality.”
Companies could disclose more specific information about the key performance indicators they apply to their executives “as long as the playing fields are going to be equal, and that can only happen should the regulatory requirements stipulate a similar degree of disclosure across the board”.
Still, Pretorius believes that the escalation of executive remuneration over the past 15 years has been “abnormal” — and something needs to be done about it.
“I personally do not think it is sustainable, because it is not just a business issue anymore. It has become a really important and sensitive social issue.”
Boards and remuneration committees all over the world are “grappling with this matter”, he says. “Inequal- ity is a major talking point and steps are being taken to curtail this abnormal escalation.”
But the fact is that no steps have been taken in South Africa, where the payment gap between executives and employees is the biggest in the world.
“Not yet,” Pretorius admits, “because the regulatory institutions governing executive remuneration have not been prescriptive.”
Unlike in the EU, where bonuses have been capped in the financial services sector. Or in Australia, where shareholders vote on remuneration policy and their vote is binding. If they reject the board’s remuneration policy two years running, the board is fired.
In South Africa, shareholders can vote — even if they seldom do — against a company’s remuneration policy, but their vote is not binding.
In practice, this means a company can say, as Pretorius now does, that “we are very sensitive to shareholder opinion”. And then go back to business as usual.
South African companies are quick to boast about how they follow in- ternational best practice, so why don’t their remuneration policies reflect it?
“You need to ask the Reserve Bank, Financial Services Board and the regulator of banks because they determine policy,” he says.
Isn’t this a cop-out? Why wait for the government regulators to lead the way? Can’t they just do what they believe is right?
Pretorius’s answer is revealing: this is because no matter how immoral executive remuneration may seem to the rest of us, it has to be competitive.
“We simply can’t afford to be bold in terms of the moral side of the equation and cut executive pay, because we would then run a real risk of losing some of our talented executives who have specialised knowledge and skills and who are also very mobile,” he says.
“It is going to take a very brave remuneration committee to break the mould and make the first move.”
Executives are “very aware” of what their counterparts are being paid, he says. If they think they’re being short changed, they leave.
“And believe me, in South Africa the pool of talented executives is very small. So the retention imperative is a very real one and not a shallow excuse.”
He thinks that remuneration committees should apply “a more balanced scorecard approach” to executive pay. Performance assessments “through the narrow lens of financial performance only” has encouraged short-term behaviour, which is not in the long-term interests of the company.
In South Africa, the pool of talented executives is very small. So the retention imperative is a very real one and not a shallow excuse
“It is important to assess qualitative issues such as the ability of executives to behave in an ethical manner — to expect from them high levels of employee engagement and commitment.”
He has been trying to do this at Absa, but there is shareholder resistance.
“It has attracted some criticism, because some shareholders want us to stick to a mathematical formula to assess executives purely on financial performance and reward them accordingly.”