Weathering The Storm: Equipping South African Rem Committees For Agm Challenges

Weathering the Storm: Equipping South African Remuneration Committees for AGM Challenges – Insights by Dr Chris Blair

“As AGMs in South Africa challenge Remuneration Committees outcomes, those leading boards and serving as directors can prepare for rigorous interrogation from shareholders. Forecasts suggest that the trend of elevated dissent on executive remuneration resolutions continues, with major investors poised to assert their views forcefully. To navigate this, remuneration committees (RemComs) should equip themselves with a comprehensive response framework covering the most probing inquiries. Even if these specifics go unasked, such readiness sharpens responses to related concerns.

“Proactive, detailed reporting backed by solid explanations can pre-empt many of these issues at the AGM. By enhancing transparency in remuneration reports, boards can foster greater investor confidence. Below, we outline key areas of potential challenge, drawing on evidence-based strategies tailored to South Africa's economic context - marked by high unemployment, inequality, and the need for sustainable growth under frameworks like King IV and draft King V.

Executive Leadership Remuneration: Ensuring Alignment Amid Economic Pressures

“In a South African economy strained by global headwinds and domestic challenges, the structure and quantum of top executive pay draw intense focus. Studies reveal that while governance enhancements have boosted reporting, the connection between rewards and outcomes remains inconsistent, often sparking investor pushback (Scholtz and Smit, 2015; Mans-Kemp, N., Viviers, S. and Collins, G., 2019).

Quantum of Leadership Remuneration

“Investors frequently probe why senior executive pay stays robust despite stagnant or declining organisational results over recent periods. For example, elevations in base salary amid falling key indicators like earnings per share warrant clear defence. RemComs should articulate how such adjustments reflect market necessities or strategic imperatives.

“Deviations from standard industry norms require justification, perhaps tied to unique business needs. When selecting comparison entities for positioning pay, explain the relevance of including entities from overseas or larger scales, ensuring they align with South African realities.

“Special awards, such as equity instruments, need context e.g. for retention or milestone achievements. Ratios between top pay and workforce averages address broader equity concerns; voluntary disclosure here can demonstrate commitment to fairness, especially in a high inequality setting (Bussin and Ncube, 2017). Pronounced differences with immediate subordinates might highlight leadership transition vulnerabilities, prompting explanations of talent pipelines.

Annual Performance Rewards

“Shareholders seek details on achievements justifying variable payouts to leaders. If these short-term elements dominate over longer-horizon components, clarify the balance's rationale. Payouts rising against static or reduced distributions to owners, or amid value erosion, demand linkage to non-financial contributions.

“Allowing rewards for operational or strategic goals despite financial shortfalls needs validation through stakeholder value creation. Metrics that overlap with core responsibilities should not trigger payouts without exceeding expectations. Patterns of steady annual rewards may blur lines with guaranteed elements and RemComs must affirm their variable nature. Absence of delayed vesting calls for reasoning, perhaps contrasting with global trends favouring alignment.

Metrics for Annual Rewards

“Withheld targets from prior cycles, deemed confidential, often lead to calls for hindsight revelation. Detail the process for choosing indicators, including alternatives dismissed and why. Thresholds set at planned levels might be seen as duplicating base remuneration; argue how they incentivise superior delivery.

Deteriorating key areas like workplace safety alongside growing rewards suggest misprioritisation - boards must integrate balanced scorecards, as activism research indicates (Mans-Kemp et al., 2019).

Structure and Outcomes of Extended Incentives

“Vesting of multi-year plans when investor gains fall short of basic yields prompts scrutiny. Use of modified profitability figures, excluding certain costs or decisions under management's reach, requires defence against perceived leniency.

“Preferring growth metrics over return-based ones like capital returns needs grounding in strategy. Static efficiency thresholds amid calls for progression warrant explanation. Earnings definitions omitting value reductions could imply rewards for suboptimal stewardship - refine to capture true impact. Enhancements like notional distributions during holding periods or shifts to time-based equity, demand strategic rationale.

Arrangements for Incoming Leaders

“Outline the methodology for crafting new executive packages, including how they exceed prior incumbents and determination of fairness. For forfeited entitlements from previous roles, structure replacements to embed performance conditions.

Oversight in Reward Determinations

“Confirm if judgement was applied beyond rigid formulas in outcomes, including reflections on broader contexts. Overlooking significant events affecting value invites questions on inaction. Mid-period alterations easing attainment must be justified as adaptive, not opportunistic. Historical value losses from decisions may necessitate retrospective adjustments.

Oversight Body Remuneration: Maintaining Prudence

“Adjustments to Director Remuneration: proposals for expanded fee caps without pressing requirements, or substantial uplifts, face resistance in cost-conscious times. Layering equity on top of cash needs tying to enhanced accountability.

“Ownership Mandates for Directors: lack of shareholding guidelines for board members undermines credibility; establish to promote long-term focus.

Composition, Pay Fairness, and Sustainability: Advancing Inclusive Practices

“Enhancing Board Composition: steps to broaden representation, including gender and other dimensions, correlate with superior outcomes in South African firms (Mans-Kemp and Viviers, 2015). Under the Employment Equity Amendment Act 4 of 2022 (effective from 2023, with full implementation in 2025), designated employers must pursue targets for equitable board makeup, aligning with King IV's diversity emphasis.

“Addressing Remuneration Disparities by Gender: reveal variances in average remuneration between genders at board, executive, and staff levels, explaining roots like structural biases. The amended Employment Equity Act mandates annual reporting via EEA4 forms on unjustified differentials, requiring actions to eliminate them with non-compliance risking penalties (Department of Employment and Labour, 2023). Initiatives might include audits, training, and policy reforms to close gaps, fostering economic inclusion.

“Sustainability Considerations: Integrate environmental, social, and governance (ESG) factors into operations; embedding related objectives in rewards signals priority. Research demonstrates that integrating environmental, social, and governance (ESG) factors into corporate practices, such as embedding ESG related objectives in executive remuneration structures, is associated with reducing internal pay disparities across gender and other demographic groups in South African organisations, fostering greater workplace equity (Adu, 2024).

“By anticipating these dialogues and bolstering disclosures with evidence, South African RemComs can turn AGM pressures into catalysts for trust. In an economy demanding equity and resilience, principled remuneration practices - now reinforced by EE legislation pave the way for shared prosperity.”

This article is based on research conducted by Dr Chris Blair of 21st Century, one of the largest remuneration and HR consultancies in Africa. Please contact us at [email protected] for any further information.

Total Words: 1037