PwC gives CEO pay a pass, but the devil’s in the detail

THE latest report on executive remuneration from PwC is likely to become essential reading for remuneration committee members seeking solace in an increasingly hostile environment.

Much of the 90-page report deals with why executives have to be paid so well and why efforts to restrain executive pay are not only ill-advised but inappropriate. Thus we are reminded that a shortage of top talent explains high pay and even told that the gap between executive pay and the average wage is not excessive in international terms.

PwC argues that South African executives are actually not that well paid and that in recent years the rate of increase has been modest, the implication being that the media are making a fuss where none is justified.

The figures produced seem reasonable enough: the upper quartile pay of a CEO of an average listed company is R6.6-million and lower quartile pay is just over R3-million. Executives of large mining companies scored the most; mining CEOs get an average of R8.9-million.

Although generous, these certainly are not the sort of figures that justify indignant headlines and warnings of destabilising pay gaps between executives and workers.

However, the R6.6-million and R3-million used by PwC are the executives’ “total guaranteed pay”, or TGP, which is just a portion of what they will bank.

The report does not deal with the real treasure trove in executive pay, namely share-based payments.

One rule of thumb is that the TGP is about a third of the total value of the package paid to the executive. Short-term incentives, which are usually cash, and longterm incentives, which are usually share-based, make up the rest.

But even this seems to understate the generosity heaped on executives. A recently published book, Executive Salaries in South Africa: Who Should Have A Say On Pay? by Kaylan Massie and Debbie Collier with Ann Crotty, revealed that the value of an annual remuneration package can be dwarfed by gains on share options awarded in terms of long-term incentives. And on top of these come short-term cash incentives.

The book reports that ARM’s André Wilkens, who received a TGP of R9-million in 2012, picked up an additional R71.8-million from his share options.

At Sanlam, Johan van Zyl’s TGP of R5.3-million was dwarfed by the R41-million in share option gains that year. At Nedbank, Mike Brown’s R12.5-million TPG was boosted dramatically by the R28million in share option gains.

PwC partner Gerald Seegers, who compiled the report, acknowledged that excluding a value for the share options that are awarded to executives every year “may be misleading”, but said it was almost impossible to make a meaningful comparison of long-term incentives awarded to JSE executives.

The difficulty stems from the fact that executive incentive schemes are complex and dense.

It is common practice in South Africa reports to skirt share-based payments.

However, the exclusion of share awards not only understates the level of generosity, but also makes comparisons misleading, particularly with international figures.

Thus PwC contends, on the basis of South Africa’s TGP figure, that the “most extreme” pay gap multiple in South Africa is an average of about 150 times for JSE companies with larger companies reaching 300 times.

It refers to a study of global companies which reveals a pay gap multiple as high as 600 times with one company having a multiple of 1 200 times.

PwC’s conclusion that “South Africa’s pay for CEOs is thus not extreme compared to some countries with successful economies . . .” is misleading without all the details.