How to get the balance of remuneration right

The practice of South African companies when it comes to approving remuneration policy an advisory vote by the board may be too ‘tame’ when compared with the rest of the world.

Australian practice compels boards to stand for re-election if remuneration policy is not approved upon the second attempt while the UK requires a binding vote. From the perspective of inspiring confidence in foreign investors, I believe it’s critical that we raise our game.

Getting the balance right

The King III Report on Governance, upon whose practice note the latest position paper expands, calls for companies to take into account the legitimate expectations of all their stakeholders. According to the paper, the stakeholder model does not give the shareholder de facto precedence in the matter being engaged on.

Too much shareholder involvement may hinder effective governance whilst too little can increase the risk of misunderstanding and surprises. Getting the balance right is critical, or else it’s not impossible for stakeholder dissatisfaction to result in an incident like Marikana.

The paper recommends implementing a strategy for engaging with stakeholders throughout the year, well before the annual general meeting. The result needs to be a policy that allows value to flow to all stakeholders not just towards executives and upper echelons – with an approach that encourages sustainable performance over time.

A sustainable remuneration policy needs to fit into a system of remuneration within a system of governance. It’s not just something you can make up as you go along properly engaging with stakeholders takes time and concerted effort.

Who sets the policy

In addition to proper stakeholder engagement, it’s important to ensure that their various roles regarding remuneration are understood by: human resources, senior management, the remuneration committee, the board of directors, the social and ethics, and risk committee.

Perhaps the most critical recommendation in this regard is that the people who set the policy should possess the appropriate skills. Those who’re deciding policy must have business acumen. They need to understand the dynamics surrounding the performance of the company not just financial metrics.

What employee levels should the policy address?

Over 70% of those in attendance at the introduction of the paper voted in favour of the remuneration committee being responsible for approving remuneration policy for all employees. However, this is not recommended.

For the remuneration committee to have to worry about pay for each employee is not practical,” she says. “We believe a better approach is to ensure that a good performance management system is in place that can help determine pay scales. This then frees up the remuneration committee to focus more on the issue of executive and top management pay.

How should companies deal with rejection of remuneration policy?

Less than 80% acceptance should be regarded as a warning light for companies. Most resolutions achieve 95% support in South Africa, so we need to carefully consider the impact of resolutions that have less support than this, noting that less than 75% in Australia is regarded as one strike.

It’s also important to ensure that shareholders realise they are required to vote on policy, not on the quantum of pay.

In conclusion, notwithstanding the desire for best practice, it’s impossible to try and implement a ‘boilerplate solution’ on the issue of remuneration.

You can’t just ‘cut and paste. The solutions that companies need to be working towards are with ‘best fit’ in mind and it might take some time to figure this out.

David Couldridge is a senior investment analyst at Element Investment Managers and Ansie Ramalho the Chief Executive Officer of the Institute of Directors South Africa (IoDSA).

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