It’s not how much, but HOW you pay CEOs that seems to matter!

The Wage Gap is a hot topic not only in South Africa but globally as well. Historically the gap between the typical worker and the CEO – particularly in larger organisations – has increased at an alarming rate.

According to fortune.com, the top US CEO’s have had a real increase in their income of approximately 1000% between 1978 and 2015 – this is around 25% pa. During the same period the typical US worker experienced an 11% increase in their real income. These statistics are often the source of feelings of inequality which have a number of negative effects on society and have led to increased activism against the perceived exorbitant CEO pay.

Given South Africa’s legacy of inequality, these feelings of inequality are often exacerbated and result in industrial action taking place. The South African economy has struggled to rebound from the global 2008 recession and has re-entered its own recession after two consecutive quarters of negative economic growth (Q4 2016 and Q1 2017). During tough economic times like this, CEO pay gets placed increasingly under the microscope as workers compare their levels of pay with those at the top of their organisation.

Two elements which are particularly scrutinised are the CEO’s annual increase on their fixed pay and the size of the pay out on their variable pay.

Fixed pay is the money they get paid for showing up at work regardless of performance –  whilst variable pay is in the form of short term and long term incentives that are paid for the performance of the CEO. These  should only be paid when the CEO outperforms expected company performance. They are made of of annual bonuses (short term) and share allocations that typically can be sold after 3 years if long term performance measures have been exceeded (long term).

Companies adopt a remuneration strategy that determines the balance between fixed pay and variable pay known as the pay mix. The strategy is further balanced between short term incentives (payout within one year) and long term incentives (payouts longer than 3 years). It appears that the pay strategy (mix) is pivotal in the public opinion in terms of the payout to CEOs. Its not so much about how much is paid but how it is paid  …. although the wage gap debate will always be a further issue.

We use two well-known and public examples to illustrate not only vastly different remuneration strategies but also how differently the public reacted to them:

An example of negative sentiment is former Shoprite CEO, James Wellwood Basson who received approximately R100 million pay (R49.7 million total guaranteed package and R50 million in short term incentives) last year. This means that his pay mix is 50% fixed pay and 50% variable pay all paid as a short term incentive. This pay mix caused a public stir as it was claimed that a Deli Worker at Checkers would have to work 290 years to earn what Basson earned in a month in that year. Although this figure of R100 million that Basson earned seems exorbitant at first glance, the fact that he had not received a salary increase since 2013 and had not been awarded a short term incentive in more than 5 years did not get taken into account when the public formed its opinion. Perhaps it was the high level of total guaranteed package or a lack of understanding about how Shoprite had performed relative to its financial targets in that year. The feelings of discontent remained regardless of how he had performed relative to his targets.

An example of positive sentiment is that of former Naspers CEO, Koos Bekker. Bekker is a relatively unique CEO in that he chose to forgo guaranteed pay in exchange for stock in Naspers i.e. he elected a fixed salary of R1 and to receive shares in exchange for fixed pay that were tied to performance. This is a very risky model as his fate was directly linked to the company’s value creation for more than 17 years and in order to create personal wealth he had to create wealth for the shareholders. He agreed to a deal which stated that he received almost no salary, short term incentives or pension and could be fired at 24 hours notice without compensation. Bekker sold 70% of his shares in 2015 and received (estimated) between R15 billion and R20 billion for these shares. Despite this astronomical amount, there was no public backlash in this instance. Considering that previous CEO’s have come under fire for the value of the shares that they have sold (often which have accrued over years and of significantly less value), what made this transaction fly under the publics finely tuned ‘CEO pay radar’? Perhaps it was the fact that he linked his fate to the fate of the company? Or perhaps it was the fact that he had taken a R5.6 billion company and turned it into a R700 billion company (125 times larger)? Either way, the value creation and commitment to value creation was visible to anyone that took the time to scrutinise his remuneration model.

Two examples have been presented in this case to demonstrate vastly different remuneration strategies that resulted in huge differences in public opinion. The first – in which fixed pay and bonuses were a large part of the remuneration mix  – was met with backlash from the public due to feelings of inequality.

The second  – in which the total remuneration was in long term incentive by way of shares and linked to shareholder wealth creation –  was by far the most lucrative transaction – however, it went by reasonably unnoticed. Although one can never know the exact answer why, it can be speculated that the reason for this is linked to Bekker’s commitment to linking his own well-being to that of the organisation and the astronomical achievement of wealth creation. However, Basson has also seen Shoprite grow from an eight store chain to Africa’s leading retailer with a market value of R115 billion employing more than 140 000 workers.

The difference between these two CEO’s is their pay structure. Basson commanded a lucrative fixed salary while Bekker tied his fate to that of the value creation  in the company.

Whether or not this is the difference between the way the public received their pay outs is debatable. Given the size of payout of the one versus the other and the backlash that the smaller payout received relative to the larger payout, an argument could be made that the public values a CEO that ties their own fate to that of their organisation.

Written by:

Bryden Morton
Data Manager
B.Com (Hons) Economics
[email protected]

Chris Blair
CEO
B.Sc Chem. Eng., MBA – Leadership & Sustainability
[email protected]