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Are they worth it?

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When Standard Bank proposed a R7,5m golden handshake for former chairman Derek Cooper it couldn’t have imagined shareholders might oppose what it regarded as a perfectly reasonable ex gratia payment for services rendered. As it turned out, almost 41% of shareholders opposed the payment at the bank’s AGM in May. Though too few to alter the decision of the board, it was a significant enough protest vote to act as a warning to other companies that shareholders are becoming more reactive about pay issues.

In the bigger scheme of things, Cooper’s R7,5m is a drop in the ocean. Standard Bank delivered more than R11bn in earnings to end-December 2009. Cooper had been instrumental in the bank’s strategy for the better part of a decade: the battle against the Nedbank takeover, the growth into emerging markets and in driving much of the strategy about the acquisition by China’s ICBC of a 20% stake in the South African banking group. Of course, he’d been handsomely rewarded for his troubles, earning R4,4m in 2009. However, the board argued his efforts deserved additional recognition.

Just how much is a CEO – or in the case of Cooper, a chairman – worth?

The term “executive pay” has developed negative connotations over the past decade and has become synonymous with “greed and avarice”. Whether or not the anger is justified, there’s a widely held belief – especially since the advent of the global financial crisis and the universal vilification of bankers in particular – that boards have become a law unto themselves: vehicles for the personal enrichment of their members.

For the first time in United States corporate history, shareholders at two companies recently voted to block executive pay. Some 54% of Motorola shareholders voted against CEO Sanjay Jha’s package and a majority also succeeded in blocking Occidental Petroleum boss Ray Irani’s proposed wage settlement. The Economist observed Irani’s US$52,2m package made him not only the highest paid CEO of a Top 200 company in the US but also its most overpaid when comparing his income to the performance of the group’s share price.

So how do you assess the value of a CEO?

“There’s no unique, single measure to determine the value added by a CEO,” says Neil Maslen, MD of executive talent consultancy Mindcor, whose company focuses on a broad range of issues, including not only historical performance but numerous lead indicators that also provide an insight into potential future performance.

The field of executive remuneration is vastly technical and multi-dimensional. It has spawned an entire specialist industry that’s developed with regard to the “science” of methodologies surrounding rewards systems.

In highly measurable trading environments or in asset management, where quarterly performance is rigorously compared, pay levels can be fairly easily determined. Sales staff are commission-driven, whether they actually delivered a service or simply got to the till alongside a big spending customer first. While staff wages and commissions by far make up the biggest single cost in the life of any large company, it’s executive pay that remains one of the most contentious governance issues of the 21st Century. Much of what a CEO does on a daily basis can actually not be measured – motivating the troops, or charming investors is hard to quantify, as the effects are intangible.

Comparisons are fraught with challenges, particularly when it comes to the minutiae. But the bottom line is: Do shareholders get value for money?

In conjunction with McGregor BFA, we’ve taken the amount of cash paid annually to the CEOs of the JSE’s Top 40 companies as a proportion of headline earnings.

Long-term incentive programmes do cost shareholders over time and are the ultimate wealth creation vehicle for senior executives. Depending on when directors cash in their options, it does distort the picture of annual income.

A tranche of shares issued to former Nedbank CEO Tom Boardman illustrates the point. He earned R14,5m in cash, including a R9,5m bonus, in 2009, plus was given a special award of shares with a current market value of R25m. While that’s a cost to the company, it doesn’t accurately reflect Boardman’s earnings. He’ll only realise a gain at some point in the future – provided, of course, Nedbank’s share price rises beyond the issue price of his options. Those will form part of his future earnings.

We’ve chosen for the purposes of this exercise to include only the cash paid to a CEO over the past year and have divided that into group headline earnings. The result is expressed as a percentage. The higher the number, the more expensive the CEO as a percentage of group profits. It does mean someone like Koos Bekker, CEO of Naspers (owner of this magazine) doesn’t get included in the comparisons, because he doesn’t draw a cash salary. He relies instead purely on options for his compensation.

Anglo Platinum CEO Neville Nicolau cost shareholders the highest proportion of headline earnings last year. His cash cost to the group was R8,83m in 2009. Earnings plummeted 95% to R710m – meaning Nicolau was paid 1,24% of headline earnings as the rand price of platinum plummeted and the company launched a rights issue and embarked on a significant rightsizing, which included cutting almost 19 000 jobs since 2008.

While profits declined dramatically on Nicolau’s watch, the Anglo Platinum board took a pragmatic approach to his remuneration and paid him a R2,5m bonus despite its earnings decline. It’s early days yet in the Anglo Platinum turnaround, and Nicolau is increasingly well regarded, because he’s succeeded in reducing the cost of production from a high base and significantly lowering death rates at its once notorious Rustenburg operations.

While Nicolau may have earned the highest proportion of earnings of profitable Top 40 listed companies on the JSE, he was far from the highest paid CEO. That honour goes to Norbert Platt, who was paid just over €5m for running luxury goods group Richemont. In cold cash terms, Platt earned the most of any CEO of a JSE-listed company – roughly R45m. But as a percentage of group profits it comes to a relatively modest 0,47%.

But, as a rule, overseas-based CEOs do earn larger salaries in rand terms, although those amounts do tend to be a smaller proportion of total earnings. South African-born but Australia-based BHP Billiton CEO Marius Kloppers earned around R30m (0,07% of headline earnings) last year; British American Tobacco’s Paul Adams about R35m (0,11%); SABMiller CEO Graham Mackay, based in London, R25m (0,13%); and Anglo American’s Cynthia Carroll R17m (0,05%). It can be argued that despite their anger at Carroll’s decision to freeze the Anglo dividend, shareholders got value for money out of their CEO, who has embarked on a substantial restructuring of the entire firm.

It’s Old Mutual CEO Julian Roberts who took home the highest proportion of earnings in the financial sector last year. London-based Roberts – whose aggressive restructuring of Old Mutual at the height of the financial crisis arguably saved it from break-up – earned 1,13% of headline earnings, taking home just more than £2,1m (roughly R23m), while the group earned £186m.

By comparison, Sanlam shareholders get a far better deal. Johan van Zyl cost shareholders 0,4% of headline earnings and investors in that company have seen considerably better returns over the past five years, where the locally focused insurer has substantially outperformed Old Mutual.

SA’s National Treasury is putting pressure on South African banks to mitigate the excesses of executive pay. The matter was discussed at a high-level banking sector meeting at end-May after issues about remuneration of senior bankers were raised in the Reserve Bank’s annual Bank Supervision report. Though the report conceded the banks’ remuneration schemes operated on sound principles, it did warn that many of its cash-based incentive schemes were skewed towards the short term. The issue of executive pay in the banking sector was again raised at a meeting of senior Treasury officials, including Finance Minister Pravin Gordhan and the country’s top bankers, on 31 May.

It’s an indication of greater Government intervention to come. While public statements on the issue remain temperate, Finweek understands Government might consider various wealth taxes in future Budgets – although no firm proposals have been tabled.

“We think banks need to be sensitive and we’ll be governed by what forums – such as the G20 – agree on that point (executive remuneration),” Gordhan said following the meeting, “Banks have pointed out to us that for them paying executives as much as they do, it’s about the retention of skills. But it’s a matter that we’ll continue to look into.”

Standard Bank cut executive bonuses last year, as the bank missed internal targets. CEO Jacko Maree earned just under R6m. As a percentage of R11bn worth of headline earnings, that’s a relatively modest 0,05%; the CEOs of FirstRand and Nedbank took 0,16 and 0,17% respectively.

While bankers’ remuneration is held up as the epitome of greed, the cash portion of their salaries at least is lower on average than gold, retail or insurance for that matter.

Harmony’s Graham Briggs earned 0,61% of headline earnings and Nick Holland at Gold Fields 0,4%. Retailers were also well remunerated as a percentage of group profits, with Shoprite’s Whitey Basson – no stranger to executive pay controversies – earning R24m last year, or 1,19% of headline earnings. Few long-term shareholders would begrudge Basson a cent.

Top-rated Truworths CEO Michael Mark took home 1% and Grant Pattison at Massmart made more than half his R11m package – courtesy of a performance bonus – earning 0,92% of profits.

Certainly, the wage gap in SA is considered in Government circles to be problematic. SA’s Gini coefficient, which measures income inequality, comes in at 0,67. That’s high by any standards. A number closer to zero indicates greater equality: the nearer it gets to 1, the more unequal a society in terms of income. It’s one of the key drivers behind union demands for double-digit wage increases. Executive pay disclosures have in many cases given worker representatives the ammunition they need to push for higher basic wages.

But Government will need to tread carefully if it chooses to intervene in any way in executive pay. Highly prized skills remain mobile despite the financial crisis, says Mindcor’s Maslen. Though there was a drop off in global recruitment early last year at the height of the financial crisis, searches have again picked up and talent continues to be migratory.

Other governments worldwide have sought to become involved in, if not managing actual levels of pay, forcing punitive measures on high earners. For example, Gordon Brown’s government implemented the massively unpopular 50p in the pound tax on earnings of more than £100 000/year in its final months in power.

The US government made executive wage freezes a cornerstone of its bank bailout programme in 2008. The question is whether actions such as those are sustainable. Last month, when Wells Fargo paid back the $25bn it had borrowed from the US Treasury, it made its CEO John Stumpf the best-paid head of a top 50 company in the US – awarding him shares and a cash remuneration worth $21,3m, more than double what he earned in 2008. Without the pay constraints imposed by the Treasury, Wells Fargo was again free to return to the largesse to which its executives had become accustomed.

Many executives intentionally took pay cuts last year – partly as a result of many being embarrassed by their generous packages relative to the meltdown performance of their firms as 2008 drew to a close and partly to avoid the negative publicity surrounding executive pay in a downturn. CEOs such as Lloyd Blankfein at Goldman Sachs, the top earner in 2008, dropped to number 48, while Citigroup’s Vikram Pandit plummeted to position number 50 from third spot, after he agreed to take a $1 salary with no bonus for 2009. And Jamie Dimon at JPMorgan took a 96% cut year-on-year.

Laurence Grubb, MD at Mabili Rewards, who recently returned from the prestigious global “World at Work” conference in Dallas, Texas, says: “In many respects SA is way ahead in defining executive remuneration schemes. The Americans are focused on holding on to their wealth-creating share incentives while we’re developing a greater combination of schemes to get more balance. 
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