The argument around executive remuneration has resulted in a spike in shareholder activism, as investors seek more accountability about the value executives bring and how it’s measured. In line with the King IV Report on Corporate Governance, the JSE has made it compulsory for listed companies to have remuneration policies in place. For JSE companies, PwC’s report found that most shareholders voted against proposed remuneration structures due to “insufficient disclosure” and policy being “inconsistent with best practice”, among other reasons. Say on pay – a rule in the US that allows shareholders to have a say in executive remuneration – is gaining momentum. Policy is shifting more towards shareholder satisfaction and companies are finding better ways to measure performance and how managers are compensated.
Long-term incentives are part of a reworking of remuneration that is being looked at. Instead of executives receiving large amounts in bonus payments, these payments are paid out over several years. An aspect that some business in the UK is introducing into their remuneration disclosures is a breakdown of pay ratios. These would disclose how much the CEO and top executives earn relative to employees. Some companies are going as far as disclosing the gender pay ratio as well. The report says more CEOs will in future be faced with the challenge of attracting and retaining brilliant minds. They should also be prepared to be “measured on their ability to navigate their companies through a rapidly-changing global technological environment”.
Managers have to establish a pay structure for the different jobs in the organisation. A pay structure clusters jobs into categories reflecting their relative importance to the organisation and its goals, levels of skills required as well other characteristics managers consider important. Pay ranges are established for each job category and the individual jobholders pay within job categories is then determined by factors such as performance, seniority and skill levels. Global difference in pay structure are very interesting, large organisations based in the united states tend to pay their CEOs and top managers higher salaries than do their European and Japanese counter parts. The pay between the employees at the bottom of the corporate hierarchy and those higher up is much greater in US companies than in European and Japanese companies.
As a general principal, companies should establish a formal, transparent and arms length procedure for developing a policy on the remuneration of executives and for fixing the remuneration packages of individual directors. The remuneration committee should consist exclusively of non executive directors who are independent of management and free from any business or other relationship with the company that could materially interfere with the exercise of their independent judgement. Although the chairman of the board may be a member of the remuneration committee, he may not be its chairman. The rationale behind this prohibition is to ensure that there is a balance of power on the board. The chairman of the remuneration committee is in a powerful position apropos the determination of executive remuneration. The combination of this role with that of chairmanship of the board will arguably lead too much authority being concentrated in a single individual. This would be contrary to one of the most fundamental principles of corporate governance, namely to ensure an appropriate separation of powers within the company.
The remuneration committee plays an important role in balancing the interests of the company against those of its individual employees. The remuneration committee should review and make recommendations to the board on remuneration issues, the terms of the service contracts of executive management, share option schemes and other incentivisation mechanisms. In determining the company’s remuneration policy, the committee may be guided by other companies of similar size, market capitalisation or in the industry.