The size of executive pay packages upsets many. Typically it is set by outside experts, by a directors’ remuneration committee or by reference to market data. Nevertheless the ratio of CEOs’ pay to average earnings has been increasing rapidly and I have noted previously how the earnings of the top 1 percent or so (which admittedly includes quite a few young extremely talented start-up entrepreneurs) have mushroomed while many others have enjoyed no increase in real wages over long periods. This arguably leads to the dissatisfaction currently being expressed in many countries and contributes to the rise of right wing parties and Trump style personalities, along with perceptions that globalisation is also contributing to inequality in developed countries.
Companies frequently justify high salaries on the basis that they are set independently by the first two categories identified – outside experts and directors’ committees. However it is very difficult to define either of these bodies as independent. The main aim of both is to justify as high salaries as possible. Both tend to serve at the pleasure of the chief executive or chairman and would likely find their tenure shortened if they did not recognise that this was their purpose rather than setting a fair salary. However I believe that one of the culprits in setting exec salaries is the salary survey system. An exec will be categorised as sitting at least at the 75 percentile level such that the 75 percentile salary from one survey can very easily become the median salary of the following year. No executive wants to know that he is only average or below average and the people setting the salary probably don’t want to indicate that this is the case, either upsetting him or raising questions about the original poor selection or why he is not being replaced. In some cases the CEO may be exceptional but then how can the salary be set for a unique individual. Whitey Basson of Shoprite in South Africa received fractionally over R100 million in the most recent year (possibly greatly distorted by the irregular accrual of share options etc) but receives much support in view of his record over four decades in expanding the group and in particular his successful expansion into the rest of Africa. What then should be his share of the added value attributable to his ‘unique’ qualities.
The other aspect of exec salaries is the role of shareholders. In South Africa complying with the King III code recommendation of a non-binding vote on directors’ remuneration is a stock exchange listing requirement but other countries go considerably further than this. The King IV draft takes it little further, prompting the local Companies and Intellectual Properties Commission (CIPC), a body not known for either competence or reformist zeal, suggests that a binding vote should be one of the listing requirements of the stock exchange, which is accordingly reviewing the issue. Failing that the CIPC could advise government (which is one of its functions) to include a requirement in the upcoming Companies Amendment Bill.
The whole subject needs a good airing as directors do seem to be taking liberties with the companies for which they work. This includes not just basic salaries but incentive schemes, the details of which are sometimes only disclosed in arrears, if at all. There have been too many cases where large bonuses have accrued to CEOs even when companies have underperformed both in absolute terms and relative to the market or their peers.