Executive pay under scrutiny: Legislative changes explained

Recent legislative changes, particularly the Companies Amendment Bill 2024 and amendments to the Johannesburg Stock Exchange (JSE) Listings Requirements, have significantly altered corporate governance and remuneration policies.

King IV Principle 14 emphasises fair, responsible, and transparent remuneration practices to align with strategic objectives and ensure positive outcomes in the short, medium, and long term. The amendments affect the preparation, presentation, and reporting requirements related to executive remuneration, necessitating adjustments in how companies approach their remuneration policies and reports.

But why are these changes important for companies and organisations?

These amendments underscore the importance of transparency and accountability in corporate remuneration practices. The changes are crucial because they:

Promote shareholder engagement:
The amendments strengthen shareholder influence over executive pay by mandating companies to present their remuneration policies and reports for shareholder approval.
Ensure compliance with corporate governance:
The alignment with King IV’s principles emphasises fair and responsible remuneration, fostering a sustainable and ethical corporate environment.
Reduce regulatory duplication:
The JSE amendments ensure that matters related to remuneration are adequately addressed through legislation rather than multiple regulatory avenues, creating a more streamlined compliance process for companies.

What are the detailed changes, and how can Companies address them?

Companies Amendment Bill 2024: Introduction of Sections 30A and 30B:

These sections require public and state-owned companies to prepare a remuneration policy and an annual remuneration report. This report must consist of a background statement, a copy of the remuneration policy, and an implementation report detailing the remuneration received by each director and prescribed officer. Action: Companies must prepare a comprehensive remuneration policy that considers fairness and responsibility in the context of overall employee remuneration. The policy should address pay equity, performance measures, and stakeholder interests.

Voting on remuneration policy:

The amendments mandate that the remuneration policy be approved by shareholders at the annual general meeting (AGM) every three years. If shareholders do not approve it, it must be presented at the next AGM or a specially-called shareholder meeting. Action: Companies should develop mechanisms for engaging with dissenting shareholders if the remuneration policy is not approved, addressing their concerns in subsequent policy reviews.

Implementation report requirements:

Section 30B requires disclosure of the total remuneration received by directors, the highest—and lowest-paid employees, and the remuneration gap within the company. Action: Companies need to ensure accurate and transparent executive remuneration reporting, focusing on clearly articulating how remuneration practices align with company performance and values.

JSE Listings Requirements Amendments:

Removal of Provisions on Non-Binding Advisory Votes: The JSE proposes removing the non-binding advisory vote on remuneration policy and implementation reports to align with the Companies Amendment Act. Action: Companies listed on the JSE will no longer need to comply with paragraph 3.84(j) for non-binding votes but should still adhere to the requirements under the Companies Act.

Schedule 14 Amendments:

The JSE will substantially remove Schedule 14 concerning share incentive schemes and focus instead on basic governance arrangements for dilutive share schemes. Action: Companies should review their share incentive schemes to comply with the new governance requirements and continue aligning with shareholder approval processes.

How does this impact the King IV Principle 14 application?

The amendments emphasise the importance of King IV’s Principle 14 by requiring companies to ensure fair, responsible, and transparent remuneration that aligns with strategic objectives. The new legislative requirements enhance the accountability of remuneration committees in overseeing the implementation of remuneration policies and the evaluation of performance.

King IV Principle 14 guidance:
The guide emphasises that remuneration policies must be designed to attract, motivate, and retain talent while promoting the achievement of strategic objectives. The changes in the legislative environment amplify the importance of transparency and fairness in executive pay.
Changes to the remuneration report:
The remuneration report now requires additional disclosures under the Companies Amendment Act.
Detailed remuneration breakdown:
Total remuneration for directors, the highest-paid and lowest-paid employees, and the average employee remuneration must be disclosed.
Remuneration gap:
Companies must present the ratio between the remuneration of the top 5% of highest-paid employees and the bottom 5%.
Shareholder engagement:
If the remuneration policy or implementation report is not approved at the AGM, the report should outline how the company will address shareholder concerns.

The following adjustments need to be made to the remuneration report:

Background statement:
This section should now include responses to shareholder concerns from previous AGMs and any significant changes to the remuneration policy.
Policy overview:
Clearly articulate the design principles of remuneration, including fair and responsible remuneration for executive management in the context of overall employee remuneration.
Implementation report:
Detail all remuneration awarded to individual governing body members and executive management, specifying performance measures and outcomes.

Conclusion

The recent amendments to the Companies Act and JSE Listings Requirements, along with the guidelines set out in King IV Principle 14, mark a significant shift toward enhancing transparency, accountability, and fairness in corporate remuneration practices. These changes require companies to adopt more rigorous and detailed remuneration policies, reports, and shareholder engagement strategies.

The emphasis is now on companies developing policies that not only comply with legislative requirements but also align with the broader ethical considerations of corporate governance. By focusing on fair, responsible, and transparent remuneration practices, companies can foster a culture of trust and integrity, promote positive outcomes, and ensure long-term sustainability.

Companies should actively review their current remuneration policies, adjust reporting mechanisms to meet the new disclosure requirements and engage with stakeholders to demonstrate their commitment to ethical remuneration practices. Through these steps, organisations can align with the evolving governance landscape, enhance their reputation, and ultimately contribute to a fairer and more equitable business environment.

Written by:

Dr Chris Blair
CEO, 21st Century
PhD (Leadership and Management), MBA (Leadership & Sustainability), B.Sc.Hons. Chem. Eng.
[email protected]