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CEOs feel the pinch as COVID-19, environmental and social matters bite

JOHANNESBURG, South Africa, 14 October 2021. More than a third of the CEOs of South Africa’s largest listed companies did not receive a salary increase in 2020 as the COVID-19 pandemic hit but 80% of JSE listed companies managed to pay out bonuses to executives—even as workers in other parts of the economy experienced reduced working hours or were laid off.

Moreover, boards now take Environment, Social, and Governance (ESG) issues into account when setting executive pay and there is growing shareholder resistance to extensive support for executive remuneration policy and its implementation reports. These are some of the findings of the Deloitte Guide to Director and Prescribed Officer Remuneration for Listed Companies, which was released recently.

The report found that the Median Total Remuneration (TR) of a CEO expressed as a single figure including basic salary, contributions, and incentives, increased by 7.09% from 2019 to 2020. But this is because of the increases at the top 5 dual-listed firms on the JSE. CEOs at large, medium, and small JSE listed firms have seen a reduction in their TR between 2019 and 2020, while the 50th percentile in large companies saw their remuneration fall by 18,25%. The average total remuneration for CEO averages around R14 million for all the 250 surveyed companies, although this is lifted by large and top companies as CEO in medium companies receive an average of R8 million.

“The impact of the pandemic varies widely by company and sector, and investors and proxy advisors are closely scrutinising executive pay outcomes,” says Tyrone Jansen, Reward Leader and Associate Director at Deloitte Africa. Jansen adds that the media and society will further ensure they reflect the shareholder and employee experience through intense  coverage and increased shareholder activism. “Remuneration committees are expected to use judgement and demonstrate fair, appropriate, and consistent decisions within the broader workforce experience. At the same time, committees will be looking to set reward frameworks that incentivise leaders to deliver business resilience and recovery in the years ahead.”

The report notes that the disparity in executive pay levels concerning lower-paid workers is a societal concern worldwide. This disparity is exacerbated in South Africa, with its additional transformational needs and high levels of unemployment. “The recent social unrest and looting are testaments to just how fragile the situation is. In an ongoing COVID-19 environment, societal issues will likely have a significant impact on the direction of executive pay. It is encouraging to see how companies are starting to grasp the nettle of pay disparity.”

Jansen further adds that a concerning trend is that more than 20% of the Top 50 JSE listed companies did not disclose the increase awarded to their CEO. He notes that should the increase, once eventually disclosed, be found not to be in line with shareholder expectations, there will be a shareholder pushback at the next AGM. “In the coming months, remuneration committees will be considering guaranteed pay levels for the year ahead, and investors have indicated that they expect to see continued restraint in this area. Where increases are awarded, higher increases have been awarded to the lowest-paid workers, particularly those in front line or critical worker industries.”

Executive remuneration comes under further scrutiny in the latest amendment of the Companies Act published this year, which is an update of the 2018 draft and once passed will be the most comprehensive update of the Act in a decade. The latest draft draws attention to executive remuneration and explicitly requires, under section 30 A, disclosure of the pay gap.

In addition to a background statement, companies will be required to disclose total remuneration (including salary, benefits, and other incentives), given to the highest paid employee and the total remuneration of the lowest paid employee. Companies will then have to publish the average and median remuneration of all employees; and the gap, expressed as a ratio, between the remuneration of the top 5% highest paid employees and the bottom 5% lowest employees.

The report notes that during the 2021 AGM season there has been a downward trend in shareholder support for the implementation report of the remuneration policy. Companies receiving more than 85% of shareholder support dropped from 62% in 2020 to 53% in 2021. 

The report notes further notes that since the 2008 crisis, companies have moved from debating to implementing curbs on executive pay. Boards now incorporate ESG considerations in setting executive pay, a trend that Jansen says will intensify in the years ahead.

Jansen concludes by noting a set of questions that boards must ask in setting executive pay starting with how the company performed relative to its targets and market conditions, whether there is a crisis or not. The next question to answer is how that performance aligns with the experience of other stakeholders. Next is to consider how ESG performance compares with overall performance.

The two next critical questions to ask relate to workers, specifically what was done to protect jobs and the health and safety of workers as well as what was done to improve the livelihood of the lowest paid employees. “Boards then have to consider the potential response from shareholders and their advisers, whether they can justify their use of discretion as well as whether their action was considered ethical by all stakeholders,” says Jansen, who notes that if in doubt, boards should probably not allow a disproportionate award increase. 

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