Executive compensation: the growing challenges in Africa

With the effects of COVID-19 shining a spotlight on the executive compensation debate, Business Chief EMEA takes a look at Deloitte’s 2020 Executive Compensation Report, as well as speaking to Tyrone Jansen, Associate Director, Human Capital, Deloitte Consulting Africa to explore the current challenges in South Africa when it comes to executive compensation.

In Deloitte’s 2020 Executive Compensation Report, the consultant company outlines five trending challenges and issues in South Africa when it comes to executive compensation, the five trends include: COVID-19, having ‘skin in the game’, is the system broken?, what is fair and reasonable?, and how much is enough?

Challenge 1: COVID-19

With organisations around the world having faced the effects of COVID-19 since the outbreak almost a year ago, Deloitte details that “COVID-19 has become the major issue confronting the world and its impact, in one way or another, will be long-lasting.” 

With much being dependent on how the pandemic continues to develop, as well as how we react and recover will determine how organisations combat the short, medium and long term challenges.

“In the context of executive compensation, there is already evidence that companies are making short-term adjustments to executive pay, on the basis that the economy will eventually recover. The only unknown is whether or not the ‘recovery’ will be a ‘V style scenario’ or a ‘U style scenario’ one in which the base of the ‘V’ is prolonged,” stated Deloitte. 

However, some leaders are expecting to see an L-shaped recovery, with life, society and capitalism fundamentally changing. While “the decisions companies make about executive compensation in the short-term are unlikely to influence the ‘scenarios’,” explains Deloitte, the company does believe that they are likely to “assist the companies in surviving whatever scenario unfolds.”

Challenge 2: Having ‘skin in the game’

Next up in the report Deloitte reflects on the concept of top executives having ‘skin in the game’ to “demonstrate their alignment with shareholders with share ownership.” 

Whilst this concept is subject to interpretation depending on multiple variables, Deloitte comments that “whatever the rationale for ‘skin in the game’ is, if the measure of ‘skin the game’ is the value of shares that are held, whether unencumbered or restricted, COVID-19 will likely have diminished their value.”

 As a result, should COVID-19 have a long term effect on the price of shares it is likely to challenge the standard policies when it comes to the relationship between share value targets/requirements and guaranteed pay. 

Deloitte expects that as a result of this challenge “the hold that restricted share ownership has on executives will diminish, and the alignment that unencumbered share ownership offers will reduce. Companies may be tempted to offer more shares due to their decreased value in relation to pay. Policies will likely vary depending on the circumstances and the nature of the executive role in the post COVID-19 situation.”

Challenge 3: Flattening the curve: is the system broken?

When it comes to the processes behind executive compensation, Deloitte continues to experience an increase in stakeholders alleging that the process is “too complicated and needs to be: simplified; subject to greater regulation; and more societally orientated.”

In its 2019 report Deloitte discussed the difficulties surrounding the promotion, implementation and policing of pay policies for executives that satisfy the needs of all parties (shareholders, employees, society and regulators). 

“This often has to be done in a complicated, volatile, ill-informed and sometimes hostile environment,” commented Deloitte. 

WIth this in mind, Deloitte outlined four contributing factors to the complexity of executive compensation with the added context of COVID-19:

1. Whilst there is a increased disclosure of information, there is less insight in relation to the complexity of executive compensation 
2. Both society and shareholder demands and placing Remuneration Committees in challenging positions 
3. Advice is reliant on surveys for companies and in some instances ill-conceived benchmarks 
4. Visibility of top executive pay to executives has enhanced the demand for executives to be well positioned next to their peers

Ultimately, Deloitte expects to see COVID-19 prompt a re-evaluation of executive pay with an increased demand for simplicity. However, “much will depend on the progress of COVID-19 as much as its lasting compact.” 

While evidence currently shows that companies are voluntarily cutting executive pay as a gesture rather than for anything permanent, “countries have adopted policies of late to ‘flatten the curve’ with respect to COVID-19. It may be that when the COVID-19 nightmare is over, these same countries may take the concept of ‘flattening the curve’ on board and apply it to executive pay.”

Challenge 4: What is fair and reasonable?

In extension of ‘flattening the curve, Deloitte also highlights the issues around what is ‘fair and reasonable’ when it comes to executive pay?

In its 2019 report, Deloitte identified that the answer to such question is dependant on seven variables which it expands on in its 2020 report with the additional context of COVID-19:

1. Well paid executives who earn more than enough to provide for their family now and future generations, who are striving to repair the damage caused by COVID-19 
2. The average person working to provide for their family frustrated at being unable to advance their position or pay, but thankful for still having a job which they may or may not appreciate is dependent on executive retention and performance
3. Union representatives working to address the needs for a fair wage, who may or may not be mindful that continued employment is dependent on executive retention and performance
4. Large numbers of semi employed people who are barely surviving the economic impact of COVID-19
5. The unemployed who can barely get by from day to day, struggling with the impact of COVID-19 
6. Politicians who are concerned with the disparities between the privileged and underprivileged and unemployed, who understand that growth in commerce and industry will enhance the economy and lead the majority into future posterity
7. The columnists who expose perversity, corruption, and the disparity between the ‘haves’ and the ‘have nots’

“Most stakeholders will concede that executives should be paid well for their services to shareholders, to business and the economy, and society as a whole,” comments Deloitte. However the company poses the question of “what is ‘fair and reasonable’ in the context of executive pay?” and “more importantly, how should it be determined?” 

In answer to this Deloitte highlights the increasing recognition, supported by the principles of King IV that, “total pay rather than any one component of pay, should be used in assessing executive pay.”

Challenge 5: How Much is Enough?

In its latest report, Deloitte reiterates from 2019 that “executive leadership is generally regarded as a scarce commodity and one for which a premium should be paid.” Those that have gained this seniority via education, experience, innate skills, or a combination of all three, “generally feel that they should be appropriately rewarded.”

Deloitte expects to see that while executives expect to “live to a certain standard and prepare for the continuation of this standard into their retirement from active service. Post COVID-19 it will not be surprising if there is a general call amongst stakeholders that ‘enough is enough’.”

Looking to the future

Commenting on the challenges outlined by Deloitte’s 2020 report and reflecting on the future for executive compensation, Tyrone Jansen, Associate Director, Human Capital, Deloitte Consulting Africa, details that it "largely depends on the situation that a company finds itself in".

Deloitte continues: "Executives that perform well (relative outperformance), still and should be rewarded well. Expect to see far larger bifurcation between those that are paid well as a result of outperformance versus those that do not perform or perform moderately well. New, simpler, alternate reward strategies may become more common in the short to medium term for firms that require a different means to incentivise and drive certain outcomes and performance.”