King III - Chapter 14: Remuneration of directors and senior executives

Overview

Chapter



14


Scrutiny of executive pay is now greater than ever as a result of the economic downturn combined with public anger over the role played by excessive levels of remuneration in the collapse of the financial markets. Globally, there is a focus on the need for robust governance processes around executive remuneration coupled with the requirement for transparency.

These themes are echoed in King III and three general principles in respect of the remuneration of directors and senior executives are set out:
  • Companies should remunerate directors and executives fairly and responsibly
  • Companies should disclose the remuneration of each individual director and certain senior executives
  • Shareholders should approve the company’s remuneration policy.
Key provisions of the Report - click here  New window
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King II laid the foundations for governance of executive remuneration. King III builds on this and takes into account the direction in which the global market is moving and the demands of institutional shareholders.

The inclusion of specific, detailed provisions around remuneration will provide South African companies with a clear framework with which to comply and enable them to achieve best practice standards.

It will, however, increase the burden on companies in so far as disclosure is concerned. Companies would also be well-advised to review their policies in light of King III to assess the extent of their compliance.

As far as companies in the financial services sector are concerned, King III does not go far enough in terms of representing best practice. In response to shortcomings identified as a result of the financial crisis, regulators across the world have been issuing codes of practice and best practice principles in this area. On 12 August 2009, for example, the Financial Services Authority in the UK became the first regulator to publish a final form code of practice on remuneration for financial services companies. We believe that it is only a matter of time before a similar code is published in South Africa.

The remuneration principles laid out in King III are to be welcomed. It is imperative that executive remuneration be aligned with the company’s strategy and that executives create long-term value for shareholders. Both themes are evident in the Code.

Globally, share-based long-term incentives have become an important part of total remuneration packages paid to executives. In the past, this has been a grey area in terms of governance in South African and it is illuminating that King III has laid down some explicit rules regarding the operation of such plans.

Given the focus placed on executive remuneration recently and the part it played in the reversal in the global economy and turmoil in the financial services sector, the King III principles around the governance and disclosure of executive remuneration will ensure that South African companies are at the forefront of international best practice. It is worth noting that, in a comparison of the King III principles on remuneration with the UK Combined Code, the similarities are striking. King III has ensured consistency between local and international governance, thus clearing the way for South African companies to attract global investment and compete effectively.
  1. Does our remuneration policy comply with the principles of King III and reflect current international best practice?
  2. Are our long-term incentive plan rules consistent with the principles of King III in terms of the use and application of performance conditions?
  3. Do our non-executive directors receive share options and/or other share incentive awards?
  4. Does our annual bonus plan link performance to clearly set objectives that create long-term value for shareholders?
  5. Do we fully disclose remuneration paid to executive directors, non-executive directors and certain senior employees in our annual remuneration report?
  6. Can we explain how our remuneration policy links into our strategic objectives?
How we can help you
Intense scrutiny of corporate governance, increased shareholder activism and the recent financial crisis have led to the restructuring and re-evaluation of traditional remuneration structures.

In addition, the role of the remuneration committee has widened. There is a need for committees to be more challenging and to exercise more discretion in managing the board to avoid divisiveness over pay. Being a member of a remuneration committee is, and should be, a tough job.

Our executive reward specialists at PwC offer a wealth of experience in this area and work closely with clients to offer practical, multi-disciplined approaches to the complex challenges faced by businesses today.

Some of the ways we can assist companies to deal with King III:
  • Assess the remuneration policy against the
    King III principles and assist with the development of a policy that is fully compliant
  • Assist with the preparation of an annual remuneration report
  • Advise on executive remuneration – base pay, benefits, annual bonuses and long-term incentives
  • Advise on non-executive fees
  • Devise performance targets and measures for annual bonuses
  • Design and implement short-term and long-term incentive arrangements (including drafting the relevant documentation, providing tax and accounting opinions and assistance with investor relations)
  • Advise on benchmarking and best practices
  • Provide training to remuneration committee members and advise them on trends and risks in the remuneration field.