A smart move

PRESIDENT Jacob Zuma’s call this week for South Africa’s mining company executives to freeze their salaries and bonuses for the next 12 months is not only a case of attempted social justice, but clever business advice.

Freezing salaries should go a long way towards stabilising the country, which is currently beset by wildcat strikes in the mining and other sectors.

You see, if workers' wages stay low and those of executives and directors continue to shoot through the roof each year, uncertainty will haunt the market place and the country as a whole as workers will continue to embark on strikes.

But if executives do not increase their wages, businesses will be more stable and secure and workers will not go on strike as frequently as they do now.

This logic could have informed Zuma’s clarion call this week, when he asked executives at mining firms to take a year-long salary freeze and called on workers to return to their jobs after a series of violent strikes.

In the wave of wildcat strikes which has hit the country's mining companies, miners and officials have been killed. The world's biggest platinum producer, Anglo Platinum [JSE:AMS], last week fired 12 000 striking workers.

As is the trend in South Africa’s private and public sector, Zuma’s call may go unheeded. As someone who has been a financial journalist all my career, I have seen some company executives pay themselves huge salaries and bonuses even when their company’s share price and earnings were depressed.

This has been questioned by many people but nothing has been done to stop it. South African companies are used to being threatened by all sorts of legislation, but not much happens to them when they transgress the law.

A good example is the employment equity laws which have been ignored by most companies. There are still companies in South Africa which spurn EE legislation, with staff complements that do not reflect the demographics of the country.

But all the instruments that are supposed to deal with these companies have not been used by the department of labour.

Additionally, the issue of pay cuts is not even legislated, making it easier for these companies to ignore the call by Zuma. We can then say that Zuma made a good call, but will it change attitudes of company executives towards pay? I doubt it.

Corporates are going to defend their big executive paydays. Their argument is always: “If we don’t pay up, our greatest minds will jump ship.”

Now, there are decent motives for compensating high-profile executives because they make decisions that are very important to their companies. This makes it a priority to appoint skilled people rather than pull in their horns on pay.

But studies have dismissed the brain drain defence for high executive salaries. They have discredited the idea that companies must keep up with their peers by compensating their executives continuously.

This peer group logic is a huge motivator for ever-rising compensation. Boards say this helps them set pay based on what the market will stomach.

Well, perhaps not.

Contrary to the prevailing line, it is understood that CEOs cannot readily transfer their skills from one company to another. In other words, the argument that they will leave if they aren’t compensated well does not hold water.

Using the peer group salary mark only pushes pay upwards.

If companies continue to buy into the logic of peer group standards, they must know that they will destabilise the economy which is currently struggling.

 - Fin24