SA’s boards are placing ESG high on the corporate agenda

The COVID-19 pandemic has forced boards to change how they work and operate. Some of these changes are temporary while others look to be more durable. Most board members have done a great job with many of the challenges thrown at them while others have struggled navigating the complexities. Directors may be more confident today, but the crisis is far from over, and remuneration decisions taken by the board are still required to be sufficiently flexible to cater for a rapidly changing world.

Organisations have only just started imagining what a post-COVID environment will look like for their employees and clients. The economic and social disruption caused by the pandemic dominate our world, along with the more established megatrends of technological disruption, climate change and fractured geopolitics. It is difficult to say what effect these trends have had, and will have, in the context of reward practices globally and in South Africa. While many see change coming, boards and management may not have started thinking about the opportunities presented by a post-pandemic environment.

These are some of the key highlights from PwC’s 13th edition of the Executive directors’: Practices and remuneration trends report released today.

“Amidst the upheaval caused by the COVID-19 pandemic as well as economic uncertainty and recent social unrest, SA’s boards have shown an increased awareness on environmental, social and governance (ESG) issues, with ESG regularly a part of the board’s agenda. Boards are starting to link purpose to a company’s strategy – in order to monitor their progress on critical items, such as climate change, they will need data and other insights on ESG.

“Although most boards are making progress in some areas such as company strategy, executive compensation and corporate culture, others are still struggling to take the next step in other areas. One of the most critical areas is that of diversity and inclusion. Our research shows that female representation in senior management and executive roles continues to remain stagnant. Companies should be doing more to promote gender and racial diversity on boards.”

Expanding upon the theme of ‘trust’, earning trust in the context of executive remuneration involves all those endeavors that we have been chasing for a good few years now: increasing transparency about structures and possible outcomes, exercising of discretion, increasing communication and, importantly, designing reward structures that are robust and lead to fair outcomes. What is ‘fair’ is a complex and contextual consideration, and appropriate consideration must be given to it. This report explores some of the actions we believe you should be taking to ensure they are giving effect to the principle of fair and responsible pay.

Embarking on a fair pay journey: Steps companies should be taking

The time to address fair and responsible pay has arrived, with many companies thinking about beginning or furthering their journeys. While a basic, compliance-based approach is a start, to fully discharge the growing list of responsibilities borne by increasing regulations and social standards, an informed and holistic approach should be adopted.

A fair pay journey should be pursued for several reasons – not least of all, that it’s ‘the right thing to do’. Getting fair and responsible pay ‘right’ is good for business – notwithstanding the arguments that diversity and inclusion improve business performance, a great employee experience, including pay that is perceived to be fair and which is motivating, is crucial to ensure that employees remain happy and motivated – contributing to thriving businesses. Acting on fair and responsible pay now is to be on the right side of growing legislative items, governance, and disclosure requirements. In addition, a sustainable business may depend on contributing toward important societal, environmental and governance (ESG) goals.

The time has come for leaders to step forward, take action and actively address fair pay in their organisations. It is critical that leadership takes the lead and is seen by employees, stakeholders and other members of society to be committed to creating working environments in which all employees are valued and rewarded and have equal opportunities to grow, develop and flourish within the organisation.

Where does one start? Could there be a roadmap to fair pay? A journey for fair pay begins with defining what it means to an organisation and ends with pursuing a plan developed within a framework which is legally, ethically, and socially compliant. Our report explores each of these reasons and journey steps in detail.

Inclusion of ESG metrics in executive pay structures

While the importance of ESG measures and their integration into incentive structures cannot be ignored in the business sector, many companies experience challenges in determining how they should be linked to executive remuneration and what the first steps are in doing so. It is important that companies do not merely include ESG performance measures for the sake of compliance or silencing their stakeholders. In so doing, companies bear the risk of hitting the target but missing the point.

PwC, in collaboration with the London Business School, has identified four design dimensions that leaders and remuneration committees need to weigh up when deciding how to integrate ESG into remuneration structures. From inputs versus outputs, deciding who is measured and how (individuals versus the organisation, and in considerations short- or long-term incentives) and the usage of underpins versus scaled targets, the report unpacks the many considerations to account for.

However, the inclusion of ESG metrics is pursued, companies should ensure that the underlying motivation for such inclusion is sound and that they have fully assessed the materiality of the ESG goal and the ramifications (and sometimes unintended consequences) which may arise.

Building trust between the board and shareholders with respect to remuneration policy and report voting

Companies and boards devote much time to structuring remuneration arrangements that are considered fair and reasonable, and which can withstand the scrutiny of shareholders and wider stakeholders. Shareholders would like their input to be considered in the structuring of such arrangements, and thus open and transparent communication about remuneration arrangements is required . Increasingly, boards may feel that the task of appeasing a diverse set of shareholders with differing views is difficult, thereby resulting in a tug-of-war, which may result in unfavourable voting outcomes on remuneration issues.

Our report explores the roles of the participants in this often ‘tense’ relationship, as well as the rules of the game by considering current and proposed legislation and regulatory frameworks and asks key questions that all stakeholders should be thinking about to address the tricky issue of remuneration voting.

Establishing clear rules to the game would help optimise outcomes for boards and shareholder players alike. ‘Co-creation’ could be the new approach adopted for shareholder engagement – indicating proactivity and the willingness to share details, however, making significant changes simply to appease shareholders is not a desired outcome of such an engagement – the decisions made must be right for the company.

Profile of an Executive Director

As of 28 February 2021, there were 285 active JSE listed companies with 725 EDs. The 725 EDs comprise 280 CEOs, 269 CFOs and 176 EDs. The average age of EDs, 52 years, has remained relatively constant over the past five years.

The average tenure for EDs by industry ranges between 1.8 and 10.9 years with Telecommunications CEOs being at the higher end of the range.

The gender and race statistics are foundational to a company’s ability to achieve fair and responsible pay. With that said, it is notable that women continue to remain a minority, with less than ⅕th of the JSE executive director grouping (at c.13%). This observation is striking at CEO level, where female representation is c.5%.

“There is still a lack of significant progress on boards, and action must be taken. The CEO, in collaboration with the board chair and the rest of the C-suite, as well as potentially a steering committee, carry a key responsibility, not only in setting the tone and overall culture of the organisation, but also in prioritising the importance of diversity. For any type of diversity and progress to succeed, sufficient buy-in and promotion from the CEO and executive team and clear consensus on the associated goals is required.”

It is important that the diversity in companies is representative of the statistics of its population. Based on our research and analysis, non-white representation at CEO level remains very low at 22% of the Top 100 of the JSE. This is a mild improvement from the previous statistics of 14%, although it remains far from representative. Non-white representation at ED levels is relatively better, with a 37% representation in the JSE Top 100.

JSE Executive Directors’ remuneration

This section provides an analysis of the JSE executive directors’ total guaranteed package (TGP) paid during the reporting period, 1 March 2020 to 28 February 2021, as well as a brief analysis of short-term incentives. Contrary to the previous Executive directors’ report (12th edition), the analysis performed excludes EDs that have resigned.

The median pay for CEOs across all sectors was R5.17m, while the CFOs median pay was R3.34m and executive directors R3.32m.

The median pay for CEOs and CFOs varied depending on the size of the company; according to our analysis the following median pay was noted:

●     Large-cap companies

○    CEOs: R10.87m

○     CFOs: R7.42m and

○     Executive directors: R5.3m.

●     Medium-cap companies

○     CEOs: R7.89m

○     CFO: R5.2m and

○     Executive directors: R3.91m.

When comparing the above results with the results contained in the 12th edition of the publication, it is important to take note of the unquantified impact of COVID-19 across all industries. A percentage movement from 2020 to 2021 has purposely been omitted from the detailed analysis for this reason.

Remuneration trends in Sub-Saharan African countries

This year, we have analysed TGP (total guaranteed package) trends among 382 companies (2020: 419) that are listed on the seven sub-Saharan African stock exchanges (excluding South Africa): Botswana, Ghana, Kenya, Namibia, Nigeria, Tanzania, and Uganda. The remuneration trends of a total of 1,137 executives were analysed.

The total guaranteed package paid to the directors of the companies that have been analysed has been translated from each country’s functional currency to the US Dollar. The median TGP paid to CEOs was $278 000, for CFOs :$186 000, and for executive directors: $137 000.

The CEO TGP analysis  for the sub-Saharan stock exchanges a  showed that Nigeria, the country with the largest nominal GDP in Africa, has the highest median CEO TGP at $323 000.

Executive pay remains a focus area for the government and we anticipate that South Africa will soon see the long-expected legislative changes that focus on disclosing (and ultimately, narrowing) the earnings gap between executives and the lowest-paid workers. The extent to which these changes will affect the existing voting rights of shareholders is yet to be seen.