20 August 2012

South Africa: Reward Top Executives According to Performance - Landelahni

Economic Development Minister Ebrahim Patel, supported by the trade unions, is committed to levelling pay from lowest to highest paid workers, and has suggested putting a cap on executive pay. Much has been made of the Gini coefficient, the income ratio measuring the disparity in pay between highest and lowest paid employees.

"This is not the right yardstick for determining salary structures," says Sandra Burmeister, CEO of the Landelahni Recruitment Group. "The real question is whether we are paying executives for a job well done, not whether we are paying them too much."

She argues that companies need to pay top executives for performance. "The challenge is to determine the key drivers we are measuring and how they are measured. We need to measure performance that guarantees the viability of the organisation in the long term and doesn't simply focus on short-term profits.

Focus must include additional issues

"Too often there is an adverse relationship between executive remuneration and company performance. We need to reward the right drivers. Instead of the relentless pressure on short-term performance and bottom-line profit, we need additional focus on issues such as safety, welfare of employees, skills development and the long-term sustainability of the company," Burmeister continues.

"In countries across the globe, from the US and the UK through Australia and Japan to South Africa, there have been shareholder revolts over pay increases in the private sector. However, it's not clear yet whether shareholders are taking more accountability and showing a greater commitment to the business, or are simply continuing to demand quick returns, measured in quarterly or six-monthly financial results, in which case any reduction in executive pay could result in increased shareholder profits."

According to the 2012 PwC Executive Directors Remuneration Report, the median increase in the past year for total guaranteed remuneration for executive directors of JSE-listed companies was between 6% and 8% - in line with or slightly higher than the inflation rate. "This reflects the stringent economic conditions that businesses have faced," says Landelahni director Alan Witherden. "However, bonuses seem to be out of proportion and not commensurate with responsibility and long-term achievement.

Local leaders must not be driven away

"The new Companies Act and King III have increased the say of shareholders on how the board rewards company executives, but it is still too early to tell whether this will address golden parachutes, guaranteed bonuses or pay for failure. We have seen some cases of deferred pay and bonuses as a consequence of non-performance. The question is why is the board awarding them in the first place?"

"Ultimately, remuneration levels are market related. Despite the recession, the global shortage of highly-skilled leaders is driving up demand. We are looking at an international market where pay levels far exceed those in South Africa. Let's not drive away South Africa's scarce leaders and curtail our ability to attract the best talent by putting an artificial cap on earnings," Burmeister concludes.

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