The Companies Amendment Bill is expected to make some progress during 2021 after apparently stalling somewhere along the legislative process during 2019 and 2020. Unless watered down before enacted, some of the proposed amendments might prompt a level of restraint so far missing from executive remuneration in South Africa.

One of the most significant sections of the bill, and likely to be one of the most contentious, are the proposed changes to Section 30 of the Companies Act relating to ‘Duties to prepare directors’ remuneration report’. If enacted, the changes will require public companies and state-owned entities (SOEs) to disclose the details of the highest and lowest paid employees in the company.

The proposed amendment, which reflects the efforts of the labour movement and some academics, will provide the first-ever detailed insight into the extent of the wage gap at individual company level in South Africa.

The Amendment Bill requires public companies and SOEs to provide “the remuneration including share options and bonuses of the employee of the company with the highest remuneration, be it the chief executive officer or any other individual holding any prescribed office in the company … ” The company/SOE will also have to disclose, in its remuneration report, “the remuneration of the employee … with the lowest remuneration in the company”.

In addition “the average and the median remuneration of all employees and the remuneration gap reflecting the ratio between the lowest paid and the chief executive officer or the highest remunerated employee in the company” must be disclosed in the directors’ remuneration report.

Unless corporate lobbyists are able to overcome trade union pressure and manage to water down the proposed amendments to the Companies Act, the much tougher disclosure requirements – which are expected to reveal extremely high pay gaps – are likely to add to calls for restraint on corporate executive pay. So far these calls, which have not had the investor muscle of the trade unions behind them, have been ignored by the powerful executive remuneration industry which includes remuneration committee members and consultants.

Mike Martin, head of research at Active Shareholder, a not-for-profit company that helps responsible shareholders to exercise their company rights, has welcomed plans for the improved disclosure. He urges companies not to bury the new information in increasingly long and over-complex remuneration reports.

“These reports have become so dense that valuable information is lost or, worse, covered up.

“Some reports only disclose information as footnotes which few read.”

At present the only major economies requiring much public disclosure are the US and UK.

UK wage gap

With effect from last year the largest 350 companies listed on the London Stock Exchange are obliged to disclose the ratio of CEO salaries to pay at the 75th, median and 25th percentile of the company’s UK employees. The disclosure was effective from the 2019/20 annual reporting period. Closed-end investment funds and companies with fewer than 250 UK employees are not covered by the requirement.

A recently-released analysis of the first set of disclosed ratios by independent UK think tank The High Pay Centre reveals that the UK’s retail industry dominates the companies with the highest ratios between CEO pay and lower- as well as median-quartile employees. The report ‘Pay Ratios and the FTSE 350’, notes that listed retail sector companies tend to be large and to employ more low-paid staff than most other industries. Retail companies also tend to employ a high proportion of under-25s, to whom the national living wage does not apply.

The ratio between the CEO of online retailer Ocado and its lower quartile employees was an eye-popping 2 820. However this was dramatically skewed by the effect of the maturing of an incentive scheme that resulted in its CEO Tim Steiner receiving a £58 million (around R1.2 billion) payout. The company said this was a once-off payment, however commentators remarked that while Steiner’s was extreme in value, payouts on maturing incentive schemes are a regular part of executive remuneration.

At retailer Tesco the CEO is paid 355 times that of an employee in the lowest quartile, at JD Group it is 348 times, at WHSmith it’s 239 and at Morrisons it is 230 times. The retail sector also has the highest ratio between CEO and median employees.

The report cautions against comparing different companies without fully understanding their respective business models.

“For example, differing reliance on indirectly employed workers who are not included in the pay ratio calculations can make the pay ratios of two ostensibly similar companies look very different.” BP and Shell, two major FTSE 100 oil companies with similarly high CEO pay levels, have very different ratio sizes. BP has a CEO to lower quartile employee ratio of 543:1 whereas Shell’s is 147:1. “This is because Shell franchises its petrol stations, meaning that low-paid retail staff working at petrol stations are not included in its pay ratio calculations, whereas BP retail workers are directly employed and included in the calculation,” explains the High Pay Centre.

Outsourcing risk

This point raises concerns that the new disclosure requirements might encourage companies to move low-paid employees off their books, through the increased use of precarious outsourcing arrangements, to avoid the spotlight. Active Shareholder’s Martin agrees that pressure to close the wage gap could lead to companies outsourcing functions such as cleaning and security.

In its report, the High Pay Centre recommends that outsourced workers be included in future pay ratio calculations.

PwC’s misleadingly modest figures for JSE companies

In its annual executive directors’ remuneration report released last year, audit firm and remuneration consultant PwC calculated that the median pay of the CEO of a JSE-listed company is only 18 times that of a semi-skilled employee and 24 times that of an unskilled employee. These misleadingly modest figures were derived by using a median figure for CEOs of all listed companies and by excluding bonuses and long-term incentives paid to executives.

UK companies are required to disclose bonuses and incentives, and the proposed amendments to the SA Companies Act is clear: “… the remuneration including share options and bonuses of the employee of the company with the highest remuneration, be it the chief executive officer or any other individual holding any prescribed office in the company as may be specified in terms of Section 30(4) and (6) of this Act.”

The proposed amendments are also clear that it is remuneration relating to individuals and not the median of groups that has to be disclosed.

Read: Is variable pay guilty of inflating the wage gap?

Unintended consequences

Another proposed amendment contained in the Companies Amendment Bill that is likely to shake up the remuneration industry is the requirement that members of a remuneration committee resign if their remuneration report is rejected by at least 25% of shareholders at two successive shareholders’ meetings.

The board must appoint a new committee within 40 business days and none of the directors who resigned are eligible for reappointment to the remuneration committee for two years.

One unintended result of this proposal could be to chill shareholder activism on remuneration.

To date the vote on remuneration policies has been non-binding and has been of little or no consequence other than virtue-signalling by institutional shareholders.

Ironically the proposed amendment, which introduces consequences to the vote, might curb this activism given institutional shareholders’ reluctance to engage forcefully with their investee companies.

Source: | Author: Ann Crotty