Chris Blair, CEO and Craig Raath, executive director of 21st Century, in partnership with Mindcor, recently participated in a seminar hosted by the YPO (Young President’s Organisation), to discuss current challenges in C-Suite compensation.
Blair shares his insights here:
After a tumultuous year in 2020, South Africa’s annual real GDP (Gross Domestic Product) decreased by 7% and unemployment hit a record high in Q4 2020, at 32.5%. It’s safe to say, whether directly or indirectly, most South Africans have been affected by the economic fallout from the COVID-19 pandemic. Although global economies experienced declines, the JSE (Johannesburg Stock Exchange) soared in the direction of the 70 000 points barrier (All Share Index).
While this may seem counter-intuitive considering the circumstances, what is measured by the JSE and what is measured by the GDP are vastly different concepts that don’t necessarily have a positive correlation with each other. In terms of executive remuneration, the impact of the pandemic on long-term incentives has been negligible, since the JSE All Share Index has rebounded and grown beyond pre-COVID levels.
CEOs and CFOs that got annual increases in 2020, received a median increase of 5,4%. Within the Extractive industry, full share schemes are the most used for CEOs and CFOs. In general, full share schemes are used slightly less frequently for Executive Directors compared to CEOs and CFOs.
In general, the LTI (Long-Term Incentive) as a percentage of TGP (Total Guaranteed Pay) increased with company size, except for the Executive Directors that had the largest percentage within medium cap companies. The median STI (Short-Term Incentive) as a percentage of TGP would have a high likelihood of being impacted by the Covid-19 pandemic, given that STIs are typically not linked to shares and have short term performance conditions, which must be met.
The rebounded share prices on the JSE were a large contributor to why these schemes seem to be unaffected by Covid-19. The value of the LTI schemes has been positively affected by the JSE’s rebound after the initial drop during the lockdown period. In general, the CFOs’ and Executive Directors’ median unvested LTI scheme value as a percentage of package was below that of the CEOs.
The value of STIs would have come under pressure because of COVID-19 and the associated lockdown. However, as these values are reflective of annual reports published in 2020, they may not reflect the full effect of Covid-19 and the lockdown.
2020, was a difficult year economically, but the JSE is running at record highs and the wage gap has marginally decreased. Whether or not the record unemployment rate and social impact of Covid-19 places renewed focus on shareholder activism and executive remuneration packages will be seen in the coming year but the South African Reserve Bank predicts economic growth of 3,8% for 2021.
Although in absolute terms this is less compared to how much the economy contracted last year, it does represent the start of a recovery that will hopefully gain momentum. Evolving performance management for a less contingent and greater virtual workforce.
That said, income inequality in South Africa is still glaring. This cold fact is adding to the renewed focus on stakeholderism as opposed to shareholderism – the concept that companies can create both profit and social value, as opposed to simply chasing profit and rewarding only the upper echelon of management.
Trends are showing that the most successful companies don’t target profit directly, but are driven by purpose – the desire to serve a societal need and contribute to human betterment. In the new era, organisations can and should be driven by purpose, not just profit. And the only way you can embed that into practice is to create both profit and social value. From a people perspective, organisations are now being chosen as employers based on their Employee Value Proposition (EVP) – and being purpose, rather than profit-driven is at the core of a strong EVP.
The concept of ESG (environment, social and governance) measures in corporate scorecards has been boosted by the move to stakeholderism and the effects of the Covid-19 pandemic.
* Environment – greenhouse gas (GHG) emissions (South Africa is the 14th largest emitter in the world), non-renewable energy, renewable energy, environmental Incidents, air quality, land management, water and wastewater management, waste and hazardous materials management and sustainability measures.
* Social – fatalities, injuries, illnesses, exposure to harmful substances, workplace policies, gender balance, diversity and inclusion, employee engagement, employee voluntary turnover, training and development, behaviours, ethics, values, and company culture.
* Governance – governance at the board level, governance at executive level, risk management, compliance, behaviours, ethics, values and culture.
Embedding purpose into practice so that it’s more than just a mission statement can yield rewards and there are surprising results on how executive pay, shareholder activism, and share buybacks can be used for the common good.
In the C-Suite space, it’s not just about shareholder benefits anymore. It’s about what shareholders can do to add value and purpose to organisations. The future is purpose driven. From there onwards, profit is a natural conclusion.