Seven executive remuneration trends in 2020 – driving sustainable business in a changing world

The King IV Report on Corporate Governance in South Africa (King IV™) has a great focus on fair, responsible and transparent pay through principle 14 that states:

“The governing body should ensure that the organisation remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in short, medium and long term.”

What then are the executive remuneration trends for 2020 that will drive the desired outcome of ensuring that business is sustainable in the changing world?

Trend 1:

Defining the purpose of the business more overtly – why are we in business? – and alignment with the world-wide trend started by Business Round Table on the “statement on the purpose of a corporation” which has been publicly signed by more than 150 CEOs of large Corporations.

The purpose of the organisation should include all of the following:

• delivering value to customers
• investing in employees through training and education
• remunerating employees fairly
• fostering diversity and inclusion, dignity and respect
• treating suppliers ethically and fairly and including diversity and inclusion
• supporting the communities in which we work and embracing sustainable practices across our businesses
• generating long-term value for shareholders through transparency and effective engagement with shareholders

Trend 2:

There will be a strong focus on changing the remuneration strategy in companies to include a section on fair and responsible pay. Some companies may even draw up separate fair pay policies but we believe it makes more sense to include this in a section in the remuneration strategy document. Already more than two thirds of JSE companies address fair and responsible pay in their remuneration strategies.

The remaining companies need to follow suit and consider some things like:

• What is a living wage?
• Is the sectoral minimum wage a living wage?
• Should the company provide a minimum level of benefits?
• What is an acceptable wage gap between the CEO and the labour force?
• What is the company’s strategy regarding the EEA4 differentials?
• How does the company pay responsibly without negatively impacting other stakeholders?
• How do you reward contribution fairly?
• How can the remuneration strategy ensure equal opportunity to employees from a pay point of view
• Is there equal pay for work of equal value across the organisation?

Trend 3:

Stakeholder engagement will become part of business. The days of focusing only on the shareholders (shareholder capitalism) are being replaced swiftly by stakeholder capitalism – value creation for all stakeholders including:

• employees
• society
• consumers
• suppliers
• financiers
• the environmen
• governments
• as well as the shareholders

There will be an initial focus on shareholder engagement by engaging the institutional investors to align the remuneration strategy with environmental, social and governance (ESG) outcomes and then to align those with the remuneration strategy implementation.

Trend 4:

Executive variable pay will be re-designed to align it with the principle 14 outcomes of long-term value creation. This will be done through longer value creation measures including ESG measures, longer holding periods, minimum shareholding requirements (MSR) in-service as well as post-service and transparent reporting on both targets and the implementation of them.

Trend 5:

Executives will be held to account for sustainable performance by introducing both malus and clawback provisions in the variable pay designs. Accountability will become key in the implementation of the variable pay schemes.

Trend 6:

Golden parachutes (significant payments or benefits if employment is terminated) and short-term project-based payments will become a thing of the past as companies specifically exclude them in their remuneration policies for executives.

Trend 7:

A move to simplifying executive variable pay schemes, particularly long term incentives (LTIs), by addressing the performance measures that ensure value creation, transparent target setting.

Written by:

Bryden Morton

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

Chris Blair

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