Turnover for SA businesses

According to data collected by StatsSA, the average SA business generated 11 cents of profit for every R1 of turnover. In certain industries, such as construction, this dropped as low as 2 cents for every R1.

These figures are important when you begin to interrogate share incentive schemes and the impact that they have on ordinary shareholders.

In SA, share incentive schemes for management have historically been an effective and fair way to reward high-performing executives.

As markets edged higher, executives (and shareholders) fortunes improved as the value generated was transparent and measurable.

Today, with stagnant equity markets and increasing questions regarding the effectiveness of long-term incentives, this trend is under pressure. As a result, traditional share incentive structures are proving cumbersome and expensive.

In addition to poorly performing equity markets, new legislation, most notably Section 8C of our Income Tax Act, has added further drains on the effectiveness of current share incentive structures.

All gains arising under employment-linked share incentives (options or share purchase schemes) are taxable as income.

Taken with the recent increase in the marginal tax rate to 45%, companies are awarding greater tranches of shares to executives to compensate for this increased “cost”. In effect, ordinary shareholders are paying the price.

Despite these headwinds, progress is being made by, for example, the introduction of outcomes-based governance principles in the latest King Codes.

Improvements in financial reporting and disclosure of executive remuneration also allows ordinary shareholders to better understand how management are being remunerated.

In addition the role that non-executive directors play within internal structures such remuneration committees has been brought into focus.

Certain asset managers and individual “Activist” shareholders are also starting to make a difference.

However, much still needs to be done in this important sphere of our economy. The adage that “necessity is the mother of invention” is appropriate in such circumstances.

Share incentives have largely become a commoditised cookie cutter structure. This needs to change with new structures to better align performance conditions.

This continued innovation to share incentives structures should be focused on achieving win-win arrangements for executives and shareholders alike.