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The principle of incentives to reward corporate performance is well entrenched in the capitalist system. There’s no denying incentives drive executive behaviour and influence decision-making. Properly structured, they provide a win-win for shareholders and the executives whose job it is to deliver on pre-set targets. The work done by Stephen Dubner and Steven Levitt in their critically acclaimed books Freakonomics and Superfreakonomics bear testimony to the fact that human behaviour is affected by reward.
The 2008 financial crisis also illustrated how badly things can go wrong when there’s a misalignment of incentives and how excesses inherent in the financial system very nearly led to a global financial calamity.
It’s an issue that has activist Theo Botha hot under the collar following the recent Standard Bank Group [JSE:SBK] AGM, where more than 95% of shareholders voted in favour of the group’s remuneration policy. They did so, argues Botha, without adequate information about how senior executives are incentivised.
Says Botha: “What worries me is bonuses aren’t capped and targets for executives aren’t disclosed – so shareholders didn’t know what they were agreeing to. They’re starting from a low base this year and shareholders will be in no position in future to criticise executive packages, because they gave the company the okay to do as it pleases.”
Remuneration committee chairman Ted Woods declined to respond to Botha’s comments beyond his 2010 annual report commentary, in which he explained the imperative of retaining top talent while balancing the needs for adequate risk management: “No bonus pools are formulaically linked to revenue generation,” he wrote.
Executive remuneration remains a contentious issue globally. No longer does short-term performance translate to immediate reward. Rather, says Woods, “A disciplined system of quantitative and qualitative evaluations underpins decisions on individual remuneration.”
That appears good enough to placate most Standard Bank shareholders but not Botha, who is also concerned the lower levels of disclosure in the group’s most recent trading update compared with one delivered a year ago could open the door for excesses. It’s not a view the bank shares but it acknowledges there’s no cap on bonuses.
Banks such as HSBC put a cap on seven times the base salary of an executive, while Barclays plc in the past has had a cap of 500%. The majority of international banks, despite the tough lessons of 2008, don’t operate caps linked to base salary at all.
Perhaps shareholders are confident the odds for significant outperformance in the current financial year are so slim it’s not an issue worth fighting.
The tone of Standard’s recent trading update certainly gave little cause for celebration. CEO Jacko Maree said revenues remained under pressure, with net interest income remaining depressed by the effect of low interest rates and trading revenues were lower, while there was an improvement in the impairment line in its personal and business banking divisions but costs remained high.
SA’s lowest interest rates in 40 years have eroded returns on their own capital and have failed to make a substantial dent in average household debt to disposable income ratios, which remain at an elevated 77%. However, debt service costs have been more affordable and thus have led to a general improvement in bad debt provisions.
Matthew Pirnie, primary credit analyst at Standard & Poor’s, sees upside for SA banks in an otherwise negative environment. He’s still trying to assess the impact of foreign capital flows on SA’s economy but says banks could be negatively impacted if that flood of money slows. But if there’s further quantitative easing, capital flows will continue. Small increases in domestic interest rates would also have a positive effect on interest revenue and – initially, at least – little impact on bad debts.
Pirnie says: “As economic growth improves, increased lending and higher interest rates should enable earnings to grow.”
Will Standard Bank executives therefore benefit from having an uncapped bonus structure? Frankly, it’s too early to tell.
The 2008 financial crisis also illustrated how badly things can go wrong when there’s a misalignment of incentives and how excesses inherent in the financial system very nearly led to a global financial calamity.
It’s an issue that has activist Theo Botha hot under the collar following the recent Standard Bank Group [JSE:SBK] AGM, where more than 95% of shareholders voted in favour of the group’s remuneration policy. They did so, argues Botha, without adequate information about how senior executives are incentivised.
Says Botha: “What worries me is bonuses aren’t capped and targets for executives aren’t disclosed – so shareholders didn’t know what they were agreeing to. They’re starting from a low base this year and shareholders will be in no position in future to criticise executive packages, because they gave the company the okay to do as it pleases.”
Remuneration committee chairman Ted Woods declined to respond to Botha’s comments beyond his 2010 annual report commentary, in which he explained the imperative of retaining top talent while balancing the needs for adequate risk management: “No bonus pools are formulaically linked to revenue generation,” he wrote.
Executive remuneration remains a contentious issue globally. No longer does short-term performance translate to immediate reward. Rather, says Woods, “A disciplined system of quantitative and qualitative evaluations underpins decisions on individual remuneration.”
That appears good enough to placate most Standard Bank shareholders but not Botha, who is also concerned the lower levels of disclosure in the group’s most recent trading update compared with one delivered a year ago could open the door for excesses. It’s not a view the bank shares but it acknowledges there’s no cap on bonuses.
Banks such as HSBC put a cap on seven times the base salary of an executive, while Barclays plc in the past has had a cap of 500%. The majority of international banks, despite the tough lessons of 2008, don’t operate caps linked to base salary at all.
Perhaps shareholders are confident the odds for significant outperformance in the current financial year are so slim it’s not an issue worth fighting.
The tone of Standard’s recent trading update certainly gave little cause for celebration. CEO Jacko Maree said revenues remained under pressure, with net interest income remaining depressed by the effect of low interest rates and trading revenues were lower, while there was an improvement in the impairment line in its personal and business banking divisions but costs remained high.
SA’s lowest interest rates in 40 years have eroded returns on their own capital and have failed to make a substantial dent in average household debt to disposable income ratios, which remain at an elevated 77%. However, debt service costs have been more affordable and thus have led to a general improvement in bad debt provisions.
Matthew Pirnie, primary credit analyst at Standard & Poor’s, sees upside for SA banks in an otherwise negative environment. He’s still trying to assess the impact of foreign capital flows on SA’s economy but says banks could be negatively impacted if that flood of money slows. But if there’s further quantitative easing, capital flows will continue. Small increases in domestic interest rates would also have a positive effect on interest revenue and – initially, at least – little impact on bad debts.
Pirnie says: “As economic growth improves, increased lending and higher interest rates should enable earnings to grow.”
Will Standard Bank executives therefore benefit from having an uncapped bonus structure? Frankly, it’s too early to tell.
