Eskom, Telkom, Gold Reef Resorts - these were some of the companies lambasted for awarding excessive executive pay packages in 2008. And the crux of the matter was not how much they were getting, but rather that the pay was not related to performance.
Eskom and Telkom performed poorly. In both instances executives were rewarded nonetheless. At Gold Reef, which could take the award for the most outrageous pay proposals in the past year, the company wanted to award shares to management at 2c apiece with market value at about R15.
Frater Asset Management analyst David Couldridge says when looking at pay, he considers the "TAP" principles; transparency; accountability to shareholders through a remuneration report; and performance. "The critical issue is: is remuneration performance-related? Most companies in SA don't provide adequate disclosure to answer the question," he says.
Shareholders can look at financial performance or total return to shareholders, but long-term investors are interested also in what part of incentive remuneration is linked to building the capacity of the company to generate sustainable earnings.
"Our biggest concern with the majority of SA companies," he says, "is that they disclose as little as possible when it comes to remuneration."
According to PE Corporate Services' latest research on pay in SA, remuneration has led to inflation. But in the past three months, says CEO Martin Wescott, wage increases have been below inflation.
Though many of the 2008 annual reports have still to be published, we know company earnings in most sectors will be depressed in 2009. The time for investors to be vigilant about pay unrelated to performance is now.
"I expect executive pay to increase in the industries hardest hit," says head of the Institute of Directors Lindie Engelbrecht. "The expectation of performance is naturally low in a depressed market, so there will be cases where companies outperform this low expectation and executives will be rewarded accordingly." But, she says, this will create further anomalies because the public expects directors to be paid less during these "hard times".
"Problems are also likely to come from the many incentive schemes that are now under water'," Couldridge says. Investors will need to look out for options being issued at a discount, large issues of new options at low prices, and the possible changing of the rules of share incentive schemes.
Awareness is crucial. Wes cott says investors should watch out for "soft targets" being set for performance incentives. And they should apply the TAP principles.
Couldridge says it is also vital that the board has an appropriate balance of independent non executive directors and the right skills to ensure the incentive plans are sound.
- Bonorchis is editor at large, Business Day
