ALEC HOGG: One of the reasons, which have been proposed for the large number of strikes in South Africa, is the gap between executives and the ordinary worker – in what they are paid. For many people the problem is the executives walk away with big packages while workers struggle on small wages. Joining us now to discuss the controversial issue, and indeed, focusing on the big news of the moment in that field, which is the 68% increase in the salary of the Canadian Chief Executive of Sasol David Constable, is Johan Redelinghuys. He’s the Chairman of Heidrick & Struggles. Johan, I was privileged to publish your recent think piece on this issue and it seems to be the time where people are speaking out. We’re watching business leaders speaking out against government and an executive search guru like yourself speaking out against executive remuneration. Executive search people have often been accused of trying to drive up salaries in order to increase their fees. In this particular case, I think it was not just the fact that he had an increase; it was the amount of the increase and the juxtaposition of the increase linked to what they were negotiating for people down the line – the 7.5% compared to the 68% just seemed a little bit out of kilter.
ALEC HOGG: And the reaction of the Remuneration Committee of Sasol was rather strange.
JOHANN REDELINGHUYS: It was, wasn’t it? The thing that we have to remember is…I’m sure David Constable’s salary was negotiated initially in dollars and in a dollar amount, it somehow doesn’t sound quite as bad as it does when put together in Rands. The fact is; he’s a big international player and I suppose one has to pay what that requires.
ALEC HOGG: Is he really that big internationally? Could he get a job at a similar business?
JOHANN REDELINGHUYS: I couldn’t comment on that, but the Remuneration Committee at Sasol must have thought so. In his particular case, it was not just the salary. Remember that the salary was only R12m , which is still a very considerable salary but in the greater scheme of things that doesn’t matter if you compare it for example to some of the other people that we’ve talked about who are in a similar industry. It was the way that the benefits were put together: R18m as a sign-on bonus – R18m.
ALEC HOGG: Have you heard of that before?
JOHANN REDELINGHUYS: I’ve heard of sign-on bonuses, but that is just huge and then in addition, a R22m incentive – this is not a bonus based on performance. It is an incentive. It’s to encourage him to work, or to work hard, or to achieve the objectives. It seems a little over the top, doesn’t it?
ALEC HOGG: Is it that difficult to attract international talent to South Africa that you have to pay these kinds of numbers?
JOHANN REDELINGHUYS: It is difficult. It is difficult because we do the same thing. I can tell you that attracting people – especially to Johannesburg with the reputation that Johannesburg has in the international market – is not easy, so there is a kind of a danger pay element to this thing, which we wouldn’t see, but which people in the United States might see.
ALEC HOGG: What about the Remuneration Committee itself? Warren Buffet said he would like to see Dobermans there rather than Maltese Poodles, and in this case, they all are pretty well remunerated. Mr Dijkgraaf, who is a non-executive director, gets R2.3 million. Hixonia Nyasulu, a non-executive chairperson, gets R4.5 million per year. Jürgen Schrempp, ex-Daimler gets over R2 million for serving on that committee.
JOHANN REDELINGHUYS: Those are pretty high compensation packages for the people who are non-executives. In the greater scheme of things, that really is a high number. Those are high numbers for all three of the ones that you’ve mentioned, but it still does not detract from the fact that they have given a chief executive a package which is very, very though-provoking.
ALEC HOGG: Indeed it is, in a country like South Africa but then, if Sasol was based in New York…
JOHANN REDELINGHUYS: Well, if it was based in New York it might have played differently, but the fact is that it is based here and the fact is that the workers that we’re comparing it to are operating here. The point that I made in the piece is if the chief executive has to qualify his package because it’s an international company, then what about the other people in the organisation? Is it the same for them?
ALEC HOGG: Good point, Johan. In a way, you’re kind of shooting yourself in the foot, because Heidrick & Struggles would no doubt like to do business with Sasol. Is it because you have enough grey hair now that you can just say it as you see it?
JOHANN REDELINGHUYS: Maybe that’s it. Of course we’d like to do work with Sasol and we’ve had Sasol as a client, but when something provokes thought it needs to be said, whether one compromises one’s position in the future or not.
ALEC HOGG: The 7.7% percent increase for the rank and file: I guess next year they’ll be saying, “It’s not nearly enough”, and they might have a point.
JOHANN REDELINGHUYS: They might, but most big employers are tough with the unions, aren’t they? It was between 7.5% and 7.9%. It’s such a narrow margin and it’s so clearly defined. It does seem awfully light in comparison to 68%, doesn’t it?
ALEC HOGG: Johan Redelinghuys, thank you for your contribution today.
There is nothing wrong, on the face of it, with ensuring that a CEO recruited internationally and swimming with the big fish in the world pool of top international CEOs is treated appropriately. We know what we are in for when we go outside and what has to be paid to attract a big player to a job here. It is just that the number, 68%, seems so overwhelming in these constrained times that one wonders if the board could not have managed it differently.
The international market for leadership talent, as has been said before, works by supply and demand, just like any other market. For the rare skills needed to take on a business like Sasol there is no doubt that a special breed of executive is needed, and they don’t fall out of the trees.
But seeing this CEO’s numbers in the cold light of day and how they are made up causes some reflection. The basic salary of R12.1 million is high, but in the greater scheme of things, not beyond expectations. It is the R18 million sign-on bonus, just to take the job that sticks in the craw, and then the additional R22 million for “annual incentives” that one wonders about.
While it is standard practice for an overseas recruitment to pay for housing, relocation, travel etc., in this case the numbers do seem to be a little extravagant even for a CEO; R519,029 for relocation costs, and annually R597,230 for school fees, R1.4 million for accommodation and R561,852 for flights back to the USA. In total his benefits alone for the year 2013 amount to R19 million.
At the results presentation for the same year under review the CFO Christine Ramon says Sasol has concluded wage agreements with the unions representing most of the more than 35,000 employees for increases between 7.5% and 7.9%. The percentage increases are so precise and so different from the CEO’s numbers that one feels a sense of disquiet. Digesting it all makes one wonder how it can be fair.
The wage gap and the vast difference between the top and bottom ends of corporate hierarchies are subjects that are getting loud and rippling attention these days. Now that chief executive compensation has been forced out of the closet and sits naked in the annual report for all the world to see, there is no place to hide. The workers who are down in the lower reaches of the business know exactly what their bosses are getting.
An argument that they might wish to use is: if the boss has to be brought in line with other international companies, why are the workers, who are working in the same company after all, not also brought into “international alignment”? No matter where one is recruited.
It should be noted that Sasol and its CEO are not out of line in terms of Mr Constable’s basic salary. It is R12.1 million per annum, compared for example to the guaranteed basic compensation of Marius Kloppers when he left BHP Billiton – R31 million – and Cynthia Carroll just before she left Anglo American – R24 million. Mark Cutifani at Anglo is now on R16 million. The numbers when bonuses and shares are added are much bigger. Whitey Basson, chief executive of Shoprite, has a guaranteed R40 million per annum.
It is the trimmings around the main dish of the compensation package that make one sit up and take notice.
In the case of the Sasol CEO, there are also other factors. It’s a pity in a way that Sasol, which started as a quintessentially South African success story, but now playing very well on the international stage, had to go outside the company and outside the country to find a CEO. And that with the Government Employees Pension Fund, a major shareholder, managed by the PIC, looking on. It also seems disappointing that Mr Constable has, with a somewhat tentative commitment, made it quite clear that this is a fixed-term contract for him and that he will be returning to the US when it is done. In the meantime he will presumably make hay while the sun shines, living off an extremely generous bunch of benefits which we must assume he personally negotiated – and now having instigated a 68% pay increase.
Do the stakeholders and the 35,000 employees have any sense of things being out of balance? South Africa has a patchy history of bringing international CEOs in, often as turn-around artists. Some have adapted and done well. Navid Kneale at Clicks and Steve Ross at Edgars come to mind. Others who have been less successful have at times been accused of not understanding the South African culture or our values. It is what was said about Cynthia Carroll, and if we want to go that far back, remember Coleman Andrews? Is there any sense that the CEO of Sasol with a let-them-eat-cake attitude might be out of touch with where South Africa and its people are right now?
Not everyone has the appetite of a Koos Bekker, who has become a billionaire by refusing to take a salary and only depending on the profits of Naspers. And we would in no way expect Mr Constable to do the same, but something with a better appreciation of timing and perhaps a little less greedy at this time would have played well.
Accountants say that when examining a balance sheet, they develop a sixth sense that tells them when something is wrong and the numbers don’t stack up. Things just don’t feel right. Is there some of that here?
* Johann Redelinghuys is the chairman of the SA arm of Heidrick & Struggles the international leadership consulting business, which bought out Redelinghuys & Partners of which he was the founder.