THE remuneration of some of South Africa’s CEOs is inappropriate despite many of the companies enjoying top global rankings, according to consultancy firm Prophet Analytics’s latest labour market navigator report, released on Tuesday.
Trade unions are increasingly focusing on the gap between CEO pay and employee salaries during wage negotiations, while some government officials have called for CEO remuneration to be capped.
"South African companies are among the best performing in the world and CEO performance bonuses are consequently substantial," Prophet Analytics quantitative analysis director Peter Aling said.
However, he said, local companies had "a long way to go" to ensure remuneration was appropriate and "analogous across all private-sector organisations".
Mr Aling said corporate profitability should be the sole basis for executive remuneration.
"In Africa, some CEOs are completely overpaid, given that they delivered a poor return on shareholders’ funds, and similarly, others are underpaid," he said.
The report identified Northam Platinum CEO Glyn Lewis as the most overpaid CEO in South Africa, after he received R11.1m last year and generated a negative real return on shareholders’ funds of 4.4%.
By contrast, the most underpaid CEO in South Africa was Netcare’s Richard Friedland, who was paid R11.8m last year and generated a substantial real return on shareholders’ funds.
The latest survey involved 230 companies, up from 212 last year, mainly as a result of improvements in company reporting of executive remuneration, Prophet Analytics said.
As debates over executive pay continue, Mr Aling said none of the current calls took into consideration the rational basis for CEO remuneration, which is corporate profitability.
The Prophet Analytics report "clearly illustrates that the proportion of South Africa’s national income attributable to private business enterprises in the form of profits (as opposed to households in the form of wages) has increased from 39% in 2000 to 51% in 2012", Mr Aling said.
The report noted that, encouragingly, there was a dramatic improvement in the past year in the relationship between CEO remuneration and corporate profitability, with the correlation rising from 23% to 30%.
More managers were being rewarded for corporate profitability, both in cash and through the use of stock options.
"It is good for South Africa’s standing internationally that profitability as a determinant of CEO remuneration has increased. Other factors, such as executive tenure, the number of employees and the value of assets under management, have clearly decreased as determinants of CEO remuneration — and rightly so," Mr Aling said.
The report moots issuing stock options to management and reducing the use of cash as a performance incentive as tactics to align CEO remuneration with corporate profitability.