By Tirthankar Mukherjee
Some idle browsing during the Naadam break brought me to the text of a stunningly good speech –and all the more so because quite unexpected -- Mark Carney, Governor of the Bank of England, made at the Conference on Inclusive Capitalism – for many, an oxymoron – recently organised by the Financial Times.
Carney was blunt and forthright. “The combination of unbridled faith in financial markets prior to the crisis and the recent demonstrations of corruption in some of these markets has eroded social capital …My core point is that, just as any revolution eats its children, unchecked market fundamentalism can devour the long-term dynamism of capitalism itself.” All research suggests, Carney noted, that “relative equality is good for growth” and favoured an inclusive social contract. Much to the satisfaction of those of us who think that facing up to climate change actually offers great scope for technological progress and economic growth, he expressed his disappointment that “Environmental degradation remains unaddressed, a tragic embarrassment now seldom mentioned in either polite society or at the G20.”
Such introspection has become common since Thomas Piketty cast fresh light on inequality and in a matter of weeks following its publication, the debate about his book became more important than the book itself, or so it seemed to me. I cannot swear to any link between this surge in awareness about inequality and some recent developments in the long ongoing protests against executive pay in global mining, but I would refer to a few of these, seeking ways to honestly and fairly determine how much a man is worth when his pay check is being prepared.
South Africa is the centre of this present debate. There, the Association of Mineworkers and Construction Union (Amcu), then on a wage strike, said the top management at Amplats, Impala Platinum and Lonmin was earning 209 times what the lowest-paid workers were paid. “Over and above their unusually obscene salaries, top management get paid out in share options and share dividends that come to millions of rands,” it said. (Very roughly, one USD gets 10 South African rands.) This is not untrue. The Amplats CEO, his 11 executives and top management have been awarded R25.3 million in a bonus-share deal that will pay out in three years as part of a skills-retention scheme. A further R51.8 million would be awarded to the team over the same period if a number of performance criteria were met. By comparison, miners in the sector take home about R6,000 a month.
The CEO concerned, Chris Griffith, was quick to react, saying the debate should be about an affordable wage to employ more South Africans rather than comparing salaries of educated, skilled executives with workers with few or no skills and limited education. “There’s a salary number for a certain skill that will enable employment and enable people to have a living wage and employment, and for business to prosper,” he said. “Ultimately, all those ranges depend on skill, education and supply and demand. In South Africa, we have 35% unemployment. Do we want higher unemployment so fewer people can be paid more? If this debate is around the comparison of CEO pay and somebody else, then we’re completely missing the point. There is a greater supply of lower-skilled people,” he said.
Joining the slanging match, the National Union of Mineworkers said the gap between the workforce and executives was simply too large. Frans Baleni, its general secretary, noted how workers rightly felt resentful when highly paid CEOs made bad business decisions that resulted in retrenchments.
“Am I getting paid on a fair basis for what I’m having to deal with in this company? Must I run this company and deal with all this nonsense for nothing? I’m at work. I’m not on strike. I’m not demanding to be paid what I’m not worth,” Mr Griffith said. I checked the 2013 Amplats annual report, and found that Mr Griffith was paid a total R17.6 million, of which R6.7 million was his basic salary.
His boldness and bluntness did not, however, have many takers at the recently held Investing in Resources and Mining in Africa conference in Johannesburg, where speaker after speaker felt that mining executives’ pay is out of kilter with their companies’ performance and a review of the way packages are structured should take place.
Fund managers overseeing billions of rand in investments criticised CEOs’ pay. “The mining industry is heading in the wrong direction and very rapidly I shall say,” said one. “My advice to the CEOs: Your personal greed is the gest obstacle for the turning of this trend. Come down with the pay packages or get out.”
A senior executive of the state-owned Public Investment Corporation (PIC), which has more than R1.4 trillion in assets, supported him. “South Africa’s mining industry is going through a very, very hard period. Costs are going up at double-digit rates, margins are not coming in; yet we are seeing , rises in executive pay at a time when trade unions are asking for a lot of money. In the gold industry it is surprising that some CEOs are getting huge salaries in bonuses when there is no free cash flow.”
And so it went, until Bernard Swanepoel, chairman of the conference and a former CEO himself, rounded off things by saying pay packets were “exorbitant and over the top”. A new pay determination forum was needed. “The credibility of executive management gets undermined by pay which is disproportionate to performance of companies,” Mr Swanepoel said.
With the heat thus turned on regulatory intervention into the issue becomes likely, and in its latest “Executive Directors’ Remuneration Practices and Trends” report, advisory firm PwC has warned that this could have undesired, and undesirable, consequences. The report did note that, globally, there was a trend towards greater regulation of executive pay, with changes to disclosure requirements and maximum remuneration in the public sector being capped in some countries in the European Union.
Speaking at a media briefing on the report, a labour market analyst said he was alarmed by the emerging trend of government intervention in companies’ remuneration schemes. “South African companies currently have 24% yearly return on shareholder value, which is the highest among 135 countries, which is why our business [sector] continues to expand even in depressed economic circumstances,” he said. “The key driver of corporate performance is the incentive that exists for executives to increase their earnings. I think the trend toward regulatory intervention and interference in the remuneration of executives is going to, ultimately, be disastrous for the country.” He added that everything was moving in the right direction, as at the moment, the correlation between corporate performance and executive remuneration was 68%.
A PwC economic adviser, Dr Roelof Botha, concurred with this, stating that overregulation in an economy would have negative effects, but “until the time that economic policymakers understand the value added [by top executives] [the] debate [will continue] about remuneration.”
Ansie Ramalho, CEO of Institute of Directors Southern Africa, was conciliatory in saying that government regulation was not the answer, but there had to be some form of regulation of executive pay. She suggested self-regulation measures to be implemented by the private sector. Such measures could be based on the financial performance of the company in question in combination with other factors such as the company’s contribution to the community and the country at large.
We shall hear more about this, and maybe you will also hear more about this from me.