Abracadabra! The veil of illusion lifts, only to find another, quicker sleight of hand; and out of the blue a growing number of shareholders baulk at poorly explained remuneration decisions.
There’s the case of cement producer PPC, where, panicked by the departure of the former CEO, one long term director, Peter Esterhuysen’s pay was increased by 147% to R9m. “We felt it very important to retain Mr Esterhuysen” it was explained. Another, CFO Tryphosa Ramano received a R1.2m “welcoming handshake”, repayable if she leaves within a year. Shareholder activist, Theo Botha’s request for clarity on pay policy had both the Chairman and head of the remuneration committee “groping for answers”, reported David Carte.
And then there is the case of Reunert, where Nick Wentzel former CEO of the electronics group walked away after just over a year R18.2m richer. R12m was “severance benefits”. There was also the demeaning behaviour of Remuneration Committee Chairman, Dr Len Konar at the JD Group’s annual meeting. In similar vein, and many spurred on by the presence of Theo Botha, we have also seen executive pay being questioned at Sappi, and Barloworld.
As an aside, and in the light of the hackneyed argument that executive pay is warranted on the basis of a “shortage of talent” and indispensability to shareholder value, I seem to be the only one a bit bemused by the reduction of the ABSA board by half. One would have thought that the share price would have collapsed at the loss of such indispensible talent.
But seriously, the most significant story on the subject in a long time was written by Moneyweb Editor, Monique Vanek this week. In her report on the PIC (Public Investment Corporation) voting against the remuneration policies of at least 5 major corporations, she highlights the important impact that King III is having. It is forcing companies to disclose the rationale behind these policies, and so far it has done little more than raise more questions that companies are finding difficult to answer.
We can only hope that this will gather momentum and that some of the arguments and features of remuneration based on shareholder value will be exposed as being a little short of absurd. They include retention bonuses, “welcoming” bonuses, and self-designed targets and budget-based pay criteria.
Remuneration should never be based on “hypotheses” but on real performance. The “target” approach is based on the pretext that one cannot be held accountable for things outside one’s control and that doing “better than expected” deserves some reward. This is senseless. If a company has not created additional wealth, no one (including general staff) deserves additional pay. I’ve never understood the logic of paying a bonus to someone when the company has done badly, merely on the pretext that it would have been worse if that someone had not been there.
Hopefully, in the new disclosure milieu the sweetheart relationship between Chihuahua packed remuneration committees and Company boards will also be scrutinized.
But here’s the real issue: it is time to let the real market determine executive pay.
This is not shareholder value, but real tangible value in the marketplace. The two are not the same. Indeed Enron and many others, including some company behaviour in South Africa, have shown that one can create shareholder value, albeit often short term, while neglecting the fundamentals of service and real market value. On the other hand, the recent performance of Shoprite (JSE:SHP) shows how tangible value can create shareholder-value, particularly if you examine the customer focused factors that drive the executive team headed by Whitey Basson. This clearly puts him in that rare group defined as creators or builders and that stand outside the “executive” market. Using the often quoted pop-star analogy, Basson can be described as the Michael Jackson of retailing. But you don’t create pop-stars simply because you pay them well!
The delinking of shareholder value from tangible customer value challenges decades of assumption about what really drives the free market system. But it goes much further: there’s increasing evidence that an exclusive focus on shareholder value has played a significant role in today’s global economic problems such as impatience, greed, immediate self-gratification, short-termism and in turn the financial crisis, social unrest, burgeoning public debt, unemployment and inequalities.
This has been recognised for some time, especially after Enron, and we have seen responses in the form of Triple Bottom lines, Balanced Scorecards, sustainability reports, integrated reports and of course, the King reports. Some remuneration committees are partly informed by these criteria in calculating executive bonuses, but for the vast majority share value formulae are either the exclusive, or the biggest determinant.
There is an appalling lack of public trust in business -- less than half of informed respondents to the latest global Edelman trust Barometer say they trust business to do the right thing. The latest Accenture global customer satisfaction survey shows a further decline in customer satisfaction with more than 60% reporting that they had switched suppliers because of poor service. In South Africa, National Consumer Commissioner Mamodupi Mohlala told a TV programme that they were receiving four times more consumer complaints against companies than they had originally expected. Add to that our lack of global competitiveness, and then we can argue that most South African companies are not succeeding in being market, service or customer driven.
The “real” market for executive pay requires first that the scarcity myth be exploded. I am not going to repeat the arguments I used before in at least two articles: “Don’t tax it: fix it!”; and the recent one: “The manager myth” apart from confirming that the “scarcity of talent” is largely either an illusion or self-perpetuated.
To have real meaning, executive remuneration, indeed arguably all remuneration in a company, should be driven by the value it adds in the product or service it provides to society as a whole. This is measurable in value added, or wealth created more robustly and less open to hypothesis or illusive and arduous remuneration reports.
It is really quite simple: shareholders and boards are not the ultimate paymasters: customers are!