Currently, the concept of “excessive pay” is viewed in hues of black and white. In South Africa, recently a debate titled “Are executives overpaid?” took place. Battle lines were predictable, with top labour activists and captains of industry coming with guns already blazing.
Labour activists fired from a platform of moral rationality while industry kingpins ducked and dived under the banner of economic rationality.
Labour argued that industry moguls draw a disproportionate amount from the pay basket, leaving “others” to scramble for leftovers. In rural Zimbabwe farmers expertly ferment raw milk into a tasty thick cream popularly known as amasi. As the bud-teasing cream coagulates, a sour to bitter liquid gathers below. Labour is saying industry chieftains skim off amasi leaving ordinary workers fighting for the bitter residual waters. Chieftains of industry argue that they are the rainmakers and thus should be legitimately paid according to the going market rates for their “uncommon” skills.
One of the debaters argued that companies are involved in a race to grab scarce skills. He remarked that the ultimate aim is becoming number one, pointing out that it did not matter how one fairly ran the race to become number two they would have lost the race. “Common skills” get “common pay” while “uncommon skills” get “uncommon pay”, economic rationality pontificates.
Chibebe’s proposal is already part of modern corporate governance practices. A number of progressive corporate governance codes such as the UK’s combined code and South Africa’s King code require disclosures of remuneration paid to senior executives and board members. For companies listed on the Johannesburg Stock Exchange and the London Stock Exchange for instance, it is mandatory to make painstaking remuneration disclosures as part of listing requirements, hoping, like Chibebe that parading the figures for the public eye will restrain “excessive pay” through shareholder activism and to a lesser extent public censure.
To my mind, SAB Miller, the South African multi-national beermaker’s recent shareholder spat personifies the failure of obligatory salary disclosures to bring down “huge payouts”. I prefer the term “huge payouts” to the conceptually fuzzy “excessive pay”. A few weeks ago the incentives of SAB Miller executives at 700% of annual basic salary, despite the beer giant recording a “small profit” were brought for a shareholder say-so. Put to vote, about 7% of fuming shareholders disapproved the “excessive pay” while an intimidating 83% gave the nod.
In another case two months ago, Old Mutual Group South Africa, in league with other agitating investors, narrowly failed to prevent outgoing Standard Bank chairman from getting a 7,5 million rand ex gratia payment, an unheard of practice of rewarding a non-executive chairman, satirised as an “unstandard handshake” by one analyst.
In May, the UK majority government-owned Lloyds Banking Group survived shareholder rebellion over the decision to award its chief executive, Eric Daniels, a bonus of £2,3 million for a “fine” individual performance in a year the 41% state-owned entity posted a £6,3 billion loss. Government through the UK Financial Investments backed the board decision to award the hefty bonus, reducing the dissident shareholders to losing rabble-rousers. These three examples come from countries with mandatory rigorous salary disclosure rules for quoted companies.
Such spectacular and serial defeats of shareholder activism warrant a fresh delimitation of the concept of “excessive pay”. From first principles, excessive means going over an acceptable level. Is there a universally recognised “acceptable level” of reasonable pay? Unfortunately, in a free-market economy, the “acceptable level” of salaries is the price established from the equilibrium between demand and supply of labour.
Let us assume that Paterson grade E5 executives in the financial services sector labour market have a market median total guaranteed pay of US$6 000 a month. A bank that succumbs to a “reasonable pay” pressure crusade, paying say US$3 000 a month, making the lowest paid grade 10 times smaller (a surrogate of “reasonableness”) at US$300 per month should be prepared to surrender its executives to talent predators. By picking one end of the stick, one cannot choose not to pick the other end, common wisdom dictates.
The 1:9 salary ratio is internally focused, ignoring what is referred to as external equity. We could begin speaking of “excessive pay”, assuming an unfettered labour market, when a bank pays its E5 executives above the median. A water-tight case would have to be presented to defend paying executives above the median.
Performance bonuses and incentive schemes can result in “huge salaries” often tagged as excessive. Why deny individuals satisfying pre-set performance standards the promised honey-comb? Shifting goal-posts when a target is achieved borders on deceit. The fact that the SAB Miller bosses are to be paid bonuses in a year when company performance is poor cannot cancel their past performance. These executives were offered, among other incentives, share options a few years ago and unfortunately these vested in a period of economic recession.
It’s a conundrum. Should their right to exercise options be denied because company performance is currently bad? Should you sacrifice your high-performing executives as collateral damage to earn a moral victory?
A high-performing commercial state-owned enterprise in Sadc posted good results for 2008, the year the recession began biting. In 2009, the board refused to approve bonus payments arguing it was not “moral” to splash cash in the midst of a recession. Incensed by the decision, the rainmaker CEO just packed his bags. They clutched onto a “moral victory” while he left with his rainmaking kit.
With “excessive pay” defined from a moral standpoint we should be prepared to dump the free market economy archetype in whole or in part for a regulated labour market like Cuba where the pay of skilled personnel is basically the same. Market competitiveness is not a strategic risk factor as the movement of labour is correspondingly highly regulated, rendering the risk of brain drain next to zero. Is this the route we want to take on our path towards “reasonable pay”?
Executive pay is a complex issue which cannot be solved through mandatory salary disclosures. Not even the hope of a shareholders thumbs-down can guarantee curbing what is seen as “excessive pay”. The inescapable reality is that a number of executive directors own investment companies that control sizeable chunks of the firms they serve.
It has been said that the butcher and the surgeon earn their living from the knife. The butcher cuts to kill. The surgeon cuts to heal. In “sanitising” salaries, a butcher approach will kill our rainmakers.
Steve Jobs, CEO of Apple is still earning a salary of US$1 per annum.
Can mandatory salary disclosure curb ‘excessive pay’? Share at firstname.lastname@example.org.