Pay rules a hindrance — Mouton
PSG CEO says top performing managers will start avoiding listed companies
● JSE regulations on the reporting of CEO pay are “flawed” and could ultimately discourage top executives from joining listed companies, said Piet Mouton, CEO of PSG.
“The approach to executive remuneration and disclosure is unfortunately flawed in my opinion. It was most probably initially done with some noble ideology but it is gaining momentum in the wrong direction,” and instead it may encourage executives to work at unlisted companies, said Mouton, speaking at the release of the group’s results for the year ended February 28 2021.
“CEOs and management teams, and not boards of directors, build companies” and should be rewarded for outperformance.
Quoting an example he highlighted in a recent letter he wrote to the JSE on the issue, Mouton said if two CEOs were each given R100m of capital and instructed to grow the business over a 10-year period with the incentive of earning 10% of the value they created over a hurdle of R200m, shareholder activists, unions and the media would be “very happy” with a CEO who had grown the business to R300m receiving a R10m bonus.
“CEO no 2 increases the value of the company to R10bn, thereby adding R9.8bn of value above the R200m hurdle. This CEO accordingly receives R980m. However, now there is a public outcry from shareholder activists, the press and unions.
“So we find ourselves in a precarious world where mediocrity in the listed environment is essentially better than embracing the potential value-add of the ultimate entrepreneur.”
Mouton said that, in contrast, if the same CEO had created a R10bn company in the private equity sector, he would be “considered a legend by his or her shareholders and be fully deserving of what he or she is paid”.
“Nobody, not even the unions, would be upset about this because they won’t know about it, with there being no requirement to disclose it in the public domain. Yet more taxes will be paid, the company will be stronger and the employees will be in a better position.”
In an interview with Business Times following the results, Mouton, who is the son of PSG founder Jannie Mouton, said another unintended consequence of full disclosure of executive pay from 2002 onwards was benchmarking, which had ensured that salaries and bonuses reached heights that might not ordinarily have been achieved. In 2002, an average banking CEO received an annual salary and bonus package of R6m, which was now sitting at about R30m.
“I believe that if we never did the declaration of the CEO and CFO remuneration they would be happy with receiving a lot less. It ended up becoming a massive benchmarking exercise and a race to the top. And nobody benchmarks downwards.”
Piet Viljoen, fund manager at Counterpoint Asset Management, agrees that industry benchmarking among listed companies — a consequence of the greater disclosure of remuneration packages at JSE-listed companies — has led to a surge in executive remuneration. As a result, Viljoen believes listedcompany executives are paid too much and a lot more than those in similar positions in privately held businesses.
“Executive remuneration [in the listed sector] is completely out of control in this environment because the companies all use consultants, and the consultants all look at the other companies and they all ratchet up pay,” he said.
But Viljoen has sympathy for listed companies and their CEOs because “being a listed company right now is not a great place to be, at least in South Africa, at the moment”.
Shareholder activist Theo Botha said though he agrees that people tend to “rack up the salaries” when given the opportunity to compare like with like, there has to be “disclosure in order to hold companies to account and to have transparency”.
Botha said though the disclosure of how companies arrive at bonus pay can be onerous and time-consuming, it is “far better to have that than nondisclosure”.
“If we go back to before 2002, we didn’t know what CEOs earned and they could just rack up R50m to R100m and we just wouldn’t know. We must have some form of disclosure otherwise who will hold them to account? That’s the real problem.”
Botha said how much information is forthcoming has also changed over the years since the disclosure of CEO pay began. At first there wasn’t much explanation about how bonuses were derived but this has changed. “It’s about how the executives derive their bonuses and therefore once we understand how they derive their bonuses, shareholders can disagree. They may say the company is setting targets far too low and achieving bonuses far too easily,” he said.
According to PSG’s draft 2021 remuneration report, Mouton was paid R13.294m, including gains from share options exercised, compared to R47.316m including gains from share options exercised in the 2020 financial year. He had no increase in his base salary for financial 2021 and is not eligible for shortterm bonuses.
The report says the significant remuneration he received in the 2020 year was mostly due to the “significant prior-year gains from exercise of share options” and should be “considered in light of PSG’s remuneration policy, which has been designed to align the interests of the executive directors with those of shareholders, together with their successful execution on PSG Group’s stated objective of value creation for its shareholders. So, if shareholders do well, management will do well and, importantly so, vice versa.”
Asked to comment on executive pay, and the issues raised by Mouton, the JSE declined to comment.
Commenting on PSG’s performance, Mouton said in spite of headwinds such as power cuts, poor service delivery and corruption, financial services group PSG Konsult, agribusiness Zeder, and private schools and tertiary groups Curro and Stadio continued to perform relatively strongly. PSG has about R21.5bn in assets under management.
He said if Capitec, from which the group has largely exited as an investment, is excluded from the 2020 financial year results, then the performance for the 2021 financial year is “flat”, which, “all things considered, is a good result as we all know Covid wreaked a bit of havoc in the last year”.
In July 2020, PSG unbundled 26.4% of its 30.7% stake in Capitec, unlocking close to R13bn in value for shareholders. The move was prompted by coming regulation that would have defined PSG as a financial conglomerate, with far more onerous regulatory and administrative burdens than the investment holding company that it has been up until now. Since then the group has also sold more shares in Capitec, with the result that it now only holds about 1.4% of the bank.
Mouton says PSG will be keeping its focus on South African investments even amid a difficult operating environment in which the economy has barely grown in the past five years. Besides dual-listed companies such as Naspers, AB InBev and Richemont, “other big businesses in South Africa who have gone after greener pastures elsewhere in the world ... I would struggle to say anybody did it with great success.
“It’s important to note that the rest of the world, particularly the developed world, is highly competitive and margins are squeezed and there are a lot of other influences that we don’t understand so well coming from South Africa. In many instances it is a lot more difficult than it is in South Africa.”
Mouton said some pockets in SA “remain highly uncompetitive”, providing opportunities for astute companies to “execute well” while rivals are too focused offshore.
The approach to disclosure is gaining momentum in the wrong direction
Piet Mouton
CEO of PSG Group