Tracey Davies, executive director of non-profit shareholder activism and responsible investment organisation Just Share, demonstrates how the pandemic ‘windfall’ for many CEOs has only increased the wealth gap. What does the relentless rise in executive pay mean for post-pandemic recovery, and what measures should be put in place to bring about greater wage parity?
The Covid-19 pandemic has brought the issue of income inequality into sharp focus. How did the ‘salary sacrifices’ that we saw during the crisis influence the debate?
The idea of the “salary sacrifice” created a perception that “we’re all in this together”, and that everyone would be sharing the pain of the pandemic. However, it soon became evident that even a global pandemic was powerless to curb the rise in executive pay. In August 2020, PwC’s Executive directors report discussed “turnaround incentives” designed to reward executives for losing out “as a result of genuine extraneous factors that have suppressed the company’s share price”.
A number of JSE-listed companies have announced ‘Covid-19 reward programmes’ and discretionary adjustments to bonuses due in 2020, claiming it was “unfair” for an executive to give up a bonus because of the pandemic’s adverse impact on the company’s financial results. The scene has been set for increased levels of income inequality as we emerge from the pandemic, which will add to the cynicism around the income inequality debate.
What benchmarks are used to measure income inequality in South Africa, and how does South Africa compare to other countries?
The Gini coefficient is a useful measure of inequality across countries. South Africa consistently scores as one of the most unequal countries on earth.
To understand better what is happening within South Africa, the Palma ratio (the ratio of the richest 10% of the population’s share of gross national income, divided by the poorest 40%’s share) is more useful. A Palma ratio of 1 or below reflects a society that is considered to be relatively equal, based on the determination that the top 10% does not receive a larger share of national income than the bottom 40%. In South Africa, the Palma ratio almost doubled between 1995 and 2014, from 5.11 to 10.13.
Which remuneration indicators and ratios should corporates be tracking and disclosing?
The extraordinary fact that we do not have mandated wage gap disclosure in South Africa is testament to the strength of the corporate lobby, which has resisted this disclosure for decades. At the very least, listed companies should disclose wage gaps between the highest and lowest earners, between genders, and between races.
These gaps should be calculated using total executive pay, including bonuses and long-term incentives, rather than just total guaranteed pay, which typically forms the smallest portion of executive remuneration. The widespread use of temporary/part-time/contract workers must also be provided for in the calculation of internal income ratios.
How do you think incentive structures – both short and long term – should be changed?
The focus of incentives should be on the very long term; limited bonuses could be paid for exceptional performance in any one year, but most incentives should be paid out, in shares, from the date of retirement. Cashing in early should be subject to early withdrawal penalties.
This would also contribute to management stability, countering recent trends in the length of tenure of CEOs. CEO pay is at the highest levels in decades, while tenures have become shorter. Incentives should also be linked to robust measurable social, environmental, and governance targets.
Are the proposed amendments to the Companies Act going to change the executive pay landscape?
As far as I am aware, even the very weak proposed amendments to the Companies Act – around wage gap disclosure and some more significant implications for votes on executive pay – are being fiercely resisted by business. This kind of lobbying, which is seldom discussed in our society, has enormous implications for social justice.
The proposed amendments are unlikely to be robust enough to significantly impact the system. Government is far too prone to business pressure on this issue. It needs to take a much bolder stance in legislating disclosure, proportionate wage gaps, and executive pay.
What practical steps do you recommend companies take to address this issue?
The most effective step would be to support progressive legislation and to abandon, or call out, corporate lobbying against the introduction of policy and regulation that aims to address inequality, like binding votes on executive pay. Companies should stop using expensive remuneration consultants who fuel the fire of ever-increasing compensation.
Remuneration committees should reset expectations of executive pay. Beyond that, we need to ask how much does a person really need to live well and how resources at our disposal can be deployed to improve the wellbeing of the poor, recognising that all value creation is attributable to a broad swathe of society, not just to a handful of CEOs.
