Executive remuneration: ethical lessons from South African report

21 Aug 2014

Practices and trends show that reward must continue to adapt to current circumstances

A report on executive director remuneration at South African listed companies says that focusing on measures to try and narrow the wage gap may not be the best way of ensuring good entry-level wages and a satisfied work force. Instead, the report emphasises that organisations must closely link executive pay strategy to their purpose and exercise restraint if they are to keep their reputation and operations intact.

PwC’s ‘Executive Directors’ Remuneration, Practices and Trends Report’ describes a post-crunch world in which investors are more sceptical, society is more demanding and politicians are hovering at the edges of business, ready to regulate further if a sector doesn’t show signs of sufficient humility.

An economics editorial within the report cautions against paying too much attention to the emotive issues around pay policy. It urges business to move beyond the “analytical fiction” and “numerical artefact” of the pay gap, arguing that the difference between what the CEO earns and what the lowest-paid worker earns shouldn’t be relevant. Instead, the report recommends that paying a living minimum wage, helping employees with high levels of debt and basic needs such as affordable housing, may be a more practical and less emotive measure.

Nevertheless, caution or restraint was apparent in the remuneration practices of most South African listed companies in 2013. The report’s analysis of companies on the Johannesburg Stock Exchange shows that, barring a few cases, South African companies have followed the modest improvement in the global economic situation, with modest increases – at the median – below inflation (5.77%) in total guaranteed packages for CEOs, CFOs and executive directors.

Although South Africa is a very individual case, with high levels of unemployment and social unrest, the report’s advice for those influencing and determining pay – including avoiding extremes of pay, closely linking pay and performance and ensuring the financial ‘wellness’ of entry-level workers – is globally applicable.

The report also focuses on the emergence of ‘eKPIs’ – key performance indicators that are based on sustainable business strategy and natural capital, rather than financial success. These, it predicts, will become the new measurement of corporate success.

Although most incentives and rewards are finance-centric and many are formula driven, with Integrated Reporting gathering speed across the world, eKPIs and their focus on long-term, sustainable values may be used to measure performance sooner rather than later.