Deloitte puts executive compensation under the spotlight

A recently released Deloitte report found that annual cash bonuses paid to the CEO and CFO over the last six years are considerable in relation to guaranteed pay, with only 12 percent of instances where a bonus was not awarded to either executive over the last six years. The report also found that increases to CEO guaranteed pay over the last five increase periods exceeded inflation by a considerable margin on a compound annual growth rate basis.

These are just two of several key issues identified in the Deloitte Executive Compensation Report, a detailed benchmark analysis of six years of top executive pay in relation to company performance and shareholder alignment among the JSE-listed top 100 companies. The study was done in preparation for the implementation of King IV, with the aim of contributing to the dialogue between boards and shareholders that it requires.

Leslie Yuill (pictured), Actuarial, Reward and Analytics leader at Deloitte, said:

"Our analysis uncovered some key trends that, in our view, definitely provide vitriol to the debate, and are, as yet, not well addressed in the disclosure within Remuneration Reports, which provide little or no explanation as to the cause or reason for these trends. The intention of this report is to inform the debate and the ensuing dialogue between companies and shareholders and to identify the major issues that all parties will face in the coming years."

The release of the study findings comes at a time when executive pay continues to attract intense media scrutiny both locally and abroad, with headlines on executive pay appearing on a frequent basis. Much of the focus this year has been on the growing inequality between those at the top of the organisation and the general workforce.

One of the issues explored in the study was the alignment between executive pay and shareholder value and company performance. "Through the last six years, collectively as a group, executive pay growth is broadly in line with growth in shareholder value creation but has generally outstripped growth in turnover and headline earnings," the report said.

Mining, Construction and Resources (MRC), however, appears to be the exception. Whereas the other sectors have doubled or trebled shareholder value, the MRC sector has destroyed value, to the extent of approximately a third. Despite this, "the impact on MRC executive pay has not been dramatic, and shareholder and company misfortune has not correlated with executive pay," the report said.

Commenting of Deloitte's reasons for undertaking the analysis and highlighting the key findings, Yuill said that with the implementation of King IV, there would be an even greater spotlight than in the past on the design, implementation, documentation, communication and disclosure of executive pay.

He said:

"Deloitte is of the view that stakeholders in South Africa require a balanced overview of the recent past to prepare for and inform the debate on the future. There is a need to establish a benchmark of the past and to provide a road map for the future to all stakeholders."

These stakeholders include company executives and managers, with both internal and external consultants who take instruction from them; Boards with remuneration committees, advised by external and independent consultants; institutional shareholders; and the media and other commentators.