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COVID-19 pandemic presents a unique opportunity to be a catalyst for change in boardrooms – PwC Executive Directors’ report

04 August 2020 PwC

The COVID-19 pandemic and its consequences are testing companies like never before. The severity of its impact on business and economic activity is still evolving, and companies are focusing on new strategies and priorities for the months ahead.

Boards of directors have a critical role in helping their companies navigate complicated COVID-19 related issues. Matters such as environmental concerns and pay inequality have been pushed to the forefront by the pandemic, while talks of the ‘great reset’ have entered the public discourse.

Leila Ebrahimi, Director in PwC’s People and Organisation department, Co-lead of the PwC Reward practice and Editor of PwC’s Executive Directors’: Practices and fees trends report 2020 says:

 “Faced with one of the most brutal economic recessions in history, companies are being asked to take the lead in some of society’s most complex and challenging issues. As companies ponder whether their existing growth strategies remain relevant in this new context, a renewed understanding of their social responsibility emerges. New leadership skills will be required to navigate companies through this pandemic and socio-economic uncertainty.

“Organisations are needing to become more agile, and flexible, and must ensure that they are planning for the future, as well as understanding potential risks that may arise in many forms.”

PwC’s 12th edition of the Executive directors: Practices and remuneration trends report released today, focuses on what factors companies should take into account when recalibrating their philosophy towards executive pay. The report also looks at the feasibility of turnaround incentives, disparity of pay, the gender gap, as well as employee retention strategies – all these issues are considered against the backdrop of the pandemic. 

Relooking at long-term incentives, and contemplating turnaround incentives

While no company would like to find themselves needing to contemplate a turnaround incentive, the current economic climate may mean that we see more companies in distress, and in need of turnaround. The report makes a distinction between those companies that introduce turnaround incentives as a result of losses suffered due to unethical conduct, and those that introduce a turnaround incentive as a result of genuine extraneous factors that have suppressed the company’s share price. In the latter instance, it is necessary to implement a turnaround strategy to regain stability in the company and drive specific objectives.

Turnaround incentives, however, require collaboration and input from the company’s shareholders, who have the most ‘say on pay’. This will also need to be considered in relation to other stakeholder groups who will need to support companies in changing course.

It is by now well accepted that long-term incentives are based on the premise of ‘pay-for-performance’. However, what exactly is ‘performance’ in the current environment? The report explores whether the achievement of aggressive growth targets remains the only acceptable trigger for payment of long-term incentives, and whether the requirement for executive ‘buy-in’ is appropriate in certain instances. The safeguarding of value, and the minimisation of the effects of the economic downturn are explored as possible alternatives to the traditional performance triggers.

Sustainable business, and social factors

The COVID-19 pandemic has brought sustainability issues to the forefront, emphasizing the criticality of only rewarding performance which will ensure the sustainability of the business in the long-term. Business continuity/sustainability has many subsets, including a focus on the ESG, but also a renewed interest in the importance of strategic workforce planning, and associated with this, critical evaluation of employee reward structures to ensure that these are ‘future-fit’, and speak to the new world which we see emerging at an accelerated pace.

The report looks at two pertinent social issues relating to remuneration within a South African context: income disparity and the gender pay gap. Despite many companies stated commitments, there remains a perception that income inequality in South Africa continues to increase. As South Africa moves towards regulated disclosure of the pay gap, following in the footsteps of countries such as the US and the UK, some wonder whether the proposed changes are enough, whilst others wonder whether the mandatory disclosures will result in improved outcomes. The report outlines PwC’s views on mandatory disclosure, as well as exploring some of the views of local investors on these important topics.

Pay differentials between men and women remain a persistent form of gender inequality in the workplace. Although there are many global initiatives aimed at solving the gender pay parity problem, none has managed to completely resolve the issue. PwC highlights that reporting is only one leg of any potential solution, and companies should actively be determining how they can build diversity and inclusion into their employee value proposition (and potentially, their incentive plans). In order to tackle inequality effectively, both from an income disparity and gender pay perspective, companies will need to bring these issues to the forefront of their strategy.

The Pay Gap

Proposed amendments to the Companies Act 2008 introduce the mandatory disclosure of the pay gap between the lowest-paid employee and the CEO, or highest-paid employee. Without an acceptable ratio, or range, even with mandatory disclosure it will be difficult to conclude on acceptability of the pay gap. Exacerbating this is the fact that numerous versions of the calculation methodologies exist which may result in the outcomes of the exercise not being comparable on a like-for-like basis. The report seeks to explore, as a starting point, what an acceptable range for the pay gap might look like for fixed-pay alone. This approach is followed on the understanding that variable pay opportunity for executives is most often calculated with reference to fixed pay, and is also highly variable and thus difficult to meaningfully compare.

In assessing income inequalities between CEOs and low-levels employees in South Africa PwC  performed an analysis using various income reference points. PwC’s analysis seeks to explore how far removed South African pay gaps are from the classic, and oft-cited “ideal CEO to average worker ratio” of Drucker, which is a ratio of 20:1 (or 25:1).

 When the analysis is performed using the National Minimum Wage as the lower reference point, the results are stark, with a 66x multiple on fixed pay alone. However, interestingly, when the National Minimum Wage is substituted for an ‘unskilled median wage’, which is the median wage of all unskilled labour within the PwC Remchannel salary survey database, the multiple shifts to 24x, within the range of Drucker’s ideal.

The analysis supports the argument for a living wage, and indicates that from a South African perspective, efforts at reducing income disparity may be better directed at increasing the pay level of the lowest level workers, rather than overly focusing on executive pay at the top. An entry-level worker will remain the same regardless of global footprint or jurisdictional location of the company, whereas a CEO’s pay will increase as does the complexity of the organisation.

The report goes on to explore what options Remuneration committees (RemCos) have available to them to rectify CEO or other executive pay, when it is determined to be too high. The practice of total remuneration benchmarking, although criticised, remains the preferred way of determining ranges for appropriate executive pay levels.  PwC’s report emphasizes that benchmarking should not be looked at in isolation, but instead used as one objective datapoint in a range of different data points. Remuneration committees (RemCos) must  apply their minds to a variety of data points to determine a sensible range in which to set the remuneration of each executive.

More recently, many executives have taken pay cuts in response to the COVID-19 crisis. This is  a measure taken by companies and their executives to help relieve the financial burden on organisations.

“Although there is some market pressure to make these cuts permanent, we anticipate this to remain a temporary measure and don’t expect to see executives taking pay cuts in the long run,” Ebrahimi adds.

Profile of an Executive Director

As at 29 February 2020 there were 329 CEOs, 291 CFOs and 826 executive directors in office.  Women continue to remain a minority on boards, at less than ?th of the JSE executive director grouping (at 14%). This observation is starker at CEO level, where female representation is at 6%. The gap identified paints a bleak picture and makes it clear that there is still much work to be done.

 Black African, Coloured and Indian/Asian representation at CEO level remains very low at a combined 11% of the Top 100 of the JSE. At ED levels this is somewhat better, with a combined 28% representation in the JSE Top 100.

JSE Executive Directors’ fees

The report reviews the total guaranteed package (TGP) for all executives paid during the reporting period and includes an overview of short-term incentives paid to executives.  The median pay for JSE CEOs in 2019 across all sectors was R5.2m for the period 30 April 2019 to 29 February 2020. For JSE CFOs the median pay for the same period was R3.2m, and for JSE executive directors R3.1m.

The median pay for CEOs of large-cap companies was R13.3m. For CFOs of large-cap companies, the median pay was R7.6m and for executive directors R5.6m.

The median TGP for CEOs of medium-cap companies was R7.9m. The median TGP for CFOs of medium-cap companies was R4.8m and for executive directors R4.0m.

For the 2020 financial year, the TGP for executives across all industries is forecast to increase by 5.2%. The TGP for executives in the financial services sector is forecast to rise by 5.4%, basic materials are expected to rise by 5.1% and telecommunications executives can expect to see a marginal increase of 4%.

Following the COVID-19 pandemic, many short-term incentives have not been paid out (or will not pay out) due to the non-meeting of previously set targets.

Remuneration trends in FTSE 100 companies and other African countries

The report also includes a summary of the median base salary trends as well as the forecast increase percentages of PwC UK’s FTSE 100 and FTSE 250 executive director remuneration.

For the FTSE 100 analysis, median base pay for CEOs sat at £850,000 for the period April 2019 to September 2019, and for executive directors £549 000 for the same period.

Finally, the report includes 419 companies listed across seven sub-Saharan Africa (SSA) stock exchanges: Botswana, Ghana, Kenya, Namibia, Nigeria, Tanzania, and Uganda. The remuneration trends of a total of 1,156 executives were analysed, with  remuneration translated from each country's functional currency to the US Dollar. The median TGP paid to CEOs over the period April 2019 to September 2019 was $270, 000, for CFOs it was $178, 000, and for other executive directors $130, 000.

Ebrahimi concludes:

“The COVID-19 pandemic presents a unique opportunity to be a catalyst for change, allowing companies who successfully harness it to reposition themselves to effectively leverage the downturn by tapping into opportunities to understand their business better, reprioritise their services and products, and identify which differentiating capabilities will give them the competitive advantage in the ‘new normal’.

“As companies shift down to a gear to strategise and reposition, they have the chance to consider what is important and what is realistic.”

The report can be downloaded here.

Quick Polls

QUESTION

The intention with lockdown was to delay or flatten the Covid-19 infection curve and give both the private and public healthcare sectors time to prepare for the inevitable onslaught. Did the strategy work?

ANSWER

No, the true numbers are not reflected. Almost a quarter of South Africans may already have been infected with Covid-19
It’s too soon to tell. We will likely get a second wave with stringent lockdown regulations in place again
Yes, South Africa bought enough time to make a significant difference. We saved lives and have passed our peak. The worst is over
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