Deloitte report recommends new Single Figure Standard

By: Deloitte

Against a background of intense public debate over executive pay, a new Deloitte study has proposed that the “Single Figure” metric, now required to be reported on by King IV, could have a broader role in establishing a standard against which companies can be measured against each other.

The 2018 Deloitte Executive Compensation Report, now in its second year, is a detailed benchmark analysis of seven years of top executive pay in relation to company performance and shareholder alignment among JSE companies. Last year’s report covered the listed top 100 companies. It was expanded this year to include the Second Tier 150 (“ST 150”) companies.

The release of the findings comes at a time when executive pay continues to attract intense media scrutiny, both locally and abroad. Much of the focus has been on the growing inequality between those at the top of the organisation and the general workforce.

“The disparity in levels of top executive pay in relation to those of the lower paid workers is a societal concern worldwide. This is particularly the case in South Africa, with its additional transformational needs and high levels of unemployment, which contribute to a powder keg of potential dissent and disharmony,” said Leslie Yuill, Actuarial, Reward and Analytics leader at Deloitte Africa.

He added, however, that the Deloitte report confines itself to a qualitative and quantitative review of the nature and disclosure of executive compensation, without commenting on its relevance or impact on societal considerations.

The King Committee published the King IV Report on Corporate Governance for South Africa (King IV) on 1 November 2016 and it became effective in respect of financial years commencing on or after 1 April 2017.

“With the full implementation of King IV taking place, there is an increasing debate on the design and implementation, the documentation, communication and disclosure of executive pay. Deloitte is of the view that in order to inform this debate both now and into the future, the debate between stakeholders in South Africa requires an authoritative and balanced overview of recent years,” Yuill said.

Additionally, Deloitte believes there is a need to establish guidelines and a roadmap for the future for all stakeholders in the executive remuneration debate; whether they be company executives and managers, Boards with Remuneration Committees, institutional shareholders, the media and other commentators.

“As with last year, our analysis has yielded a mixed bag of results across different sectors. Suffice to say that when considering the general trend rather than the more visible and often disturbing incidents of perceived abuse, there is some alignment of executive pay and shareholder value creation. Although the alignment with company performance, particularly in the downturn of recent years, is not so discernible,” said Yuill.

The report predicts that King IV will engender increased levels of dialogue between companies and their shareholders. These should have a positive impact overall on the structure of remuneration policies, and quality of disclosure in implementation policies.

“Remuneration Committees will have to continue to focus on the target setting process to ensure targets are appropriately stretching, and on the disclosure of these targets in relation to the pay-outs. We also expect to see greater vigilance around malus and clawback arrangements.”

Malus refers to the reduction of unvested or unpaid variable pay before the date that it vests, while clawback refers to compelling executives to repay amounts to the company that should not have been paid to them.

According to Yuill, there also remains a question mark over how well shareholders are equipped or motivated to take on the role of addressing and administering to the societal concerns which may not necessarily coincide with shareholder value.

In the report, Deloitte recommends that the Single Figure required to be disclosed by King IV should not merely be a metric by which annual pay comparisons are to be made. “It should be utilised in a proactive as well as a reactive sense and become a standard to inform executive pay design – allowing internal and external comparisons on pay, but most importantly inform the shareholder and societal debates around what is ‘fair and reasonable’ in executive pay.”

As laid out in King IV, the single total figure of remuneration is required for each director and prescribed officer. It  comprises of his/her salary, benefits, Short Term Incentives (STIs), Long Term Incentives (LTIs) and performance awards.

According to the report, using this as a standard would allow companies to apply some level of flexibility in pay design, whilst staying within an acceptable single figure parameter: this in contrast to the current situation in which companies are supposedly conforming to or being dictated to conform to the many and varied “benchmarks”, which are currently much maligned, misaligned and often misused.

“The Single Figure Standard might become a way by which all stakeholders could assess the full quantum of executive pay over time, from whatever perspective they view it, whether internally, externally, or by sector and/or societally,” said Yuill.