CEO remuneration seems out of control

In line with that which is occurring in most parts of the world, a serious socio-economic fault line has developed in South Africa around the remuneration packages of chief executive officers. According to a very recently released report by forensic auditors: “No single business factor… emerged as the main determinant of CEO remuneration. Other, less rational factors probably override the role that business factors play in CEO remuneration.” These findings come at a time of increasing concern about the country having one of the starkest divides between rich and poor in the world.

Using a sample group of 326 listed companies and parastatal corporations, forensic accounting firm Computus found that the average CEO remuneration of all the companies studied amounted to R4.76 million a year in the year ended June 2009. The average basic salary of a CEO in South Africa was R2.37m.

That is 38 times the R124 457 average annual income of their salaried employees. Put differently, while it takes the average wage earner just more than eight years to earn R1m, the average CEO does so every two and a half months.

The company said in a release that “the remuneration of company executives is an issue that has attracted considerable interest from shareholders, business groups and the wider community. The concerns regarding excessive remuneration packages of CEOs has come on top of long-standing community discomfort about the widening gap between the remuneration of executives and other employees, as well as some large termination payments with perceived lack of justification.”

According to Dr Philip Theunissen from Computus, the CEO remuneration of 326 listed companies and parastatal corporations, as reflected in their annual reports, were analysed by means of certain statistical formulae for the financial years ending between July 2008 and June 2009. The analysis indicated the following:

On average, the CEOs in the telecommunications industry are the best rewarded with an average annual remuneration of R11.5m, of which 55% was paid out as part of incentive schemes.

CEOs of the parastatal companies received R5.1m on average per annum, of which 51% was made up by incentive remuneration.

In spite of the severe negative economic conditions, CEOs were still able to double their normal annual earnings in 2009 with ‘performance bonuses’, while the JSE lost 42% in value during the deep recession. The variable portion of CEO remuneration dropped to 52% in 2009.

CEO remuneration increased by 11.5% per annum on average from 2006 to 2009, while the yearly earnings of the average worker increased by 15.4% over this period.

However, the average basic salary of CEOs increased by 19.9% per annum from 2006 to 2009.

CEOs still earn twice as much on average as the president of the country and three times more than the Cabinet ministers. They earned 10 times more than a director-general in 2009, while they earned 106 times more than a cleaner in the public service for the same year.

Of the CEOs, 78% earned more in a month than what the average worker earned in a year.

Dr Theunissen explained that the landscape of executive remuneration has become far more sophisticated than it was a decade ago, and complicated share schemes and bonuses are key to that.

Executive reward is multifaceted, typically including fixed short-term remuneration in the form of salary and benefits, fixed long-term remuneration in the form of pension, variable short-term remuneration in the form of annual bonus, and variable long-term remuneration in the form of deferred bonus and long-term incentive awards.

“The findings of the investigation show that performance of the individual companies is, however, by no means a determinant of CEO remuneration. Although slightly stronger, there is also no convincing indication that company size is a determinant of CEO remuneration. No single business factor therefore

emerged as the main determinant of CEO remuneration. Other, less rational factors probably override the role that business factors play in CEO remuneration,” said Theunissen.

He substantiated the findings of the empirical analysis with theoretical information and discussions by numerous trustworthy sources. In summary, it concluded:

Performance-based remuneration, often in the form of share options, has been

endorsed by researchers throughout the world to align the interests of the shareholders and the CEOs, who act as agents on behalf of the shareholders. Options, however, are not closely linked to the performance of CEOs, allowing them to benefit from movements in share prices which were due to market and industry trends beyond their control.

Many remuneration packages are determined on the basis of what others in

comparable jobs, regardless of performance, are being paid. This creates a natural ambivalence between remuneration and performance, as companies and executives seek to position themselves in the market, with no one wishing to be seen as hiring a below-average executive.

Theunissen is of the opinion that the current levels of CEO remuneration in South Africa are sending out the wrong message regarding fairness in comparison with the earnings of the average worker because it is by no convincing means the result of exceptionally talented performances.

He concluded: “In the end, it rather seems that the small number of CEOs is

using the conditions of incomplete and asymmetric information surrounding their capabilities to such an extent that, when it comes to remuneration negotiations, their individual bargaining power is far greater than the collective bargaining power of the remaining 8.4 million workers. The result is that CEO remuneration in South Africa is in all likelihood indeed out of control.”