Mining executives and their salaries is always a sensitive subject. Not so much in the discussion around it but rather that it generates heated debate, given the number of worker strikes over their own compensation. The disparities between the two have been well documented, even more so when the commodity cycle is in a downturn, and jobs are at risk. In the analysis below, David Christianson argues for executive pay, saying it’s a soft target. He says that by slashing the earnings of those tasked with managing the operations is not the answer. A must read that is sure to ignite debate, no matter what side of the fence you sit.- Stuart Lowman
By David Christianson*
The notion of a ‘pay gap’ between company executives and those who work for a wage has become a highly charged issue in global business. In the climate of economic hardship created by the enduring impact of the 2009 financial sector crisis, followed by the 2014 plunge in commodity prices, there is a popular assumption that corporate executives are ‘paid too much’, that their performance bonuses are unwarranted and that these benchmarks are only achieved by squeezing workers without mercy. In the US, the Securities and Exchange Commission has introduced measures to make disclosure of executive and worker salaries mandatory from 2017 and other developed countries are considering about similar measures.
Disclosure is of course no bad thing. However the issues at stake are widely misrepresented, especially by those who claim to speak on behalf of workers. Claims made by mineworker representatives during South Africa’s 2016 bargaining season epitomise the issue. Joseph Mathunjwa, president of the Association of Mineworker and Construction Union (Amcu), South Africa’s most radical trade union argued that the disparity between executive and worker pay packages is so large that it proves the industry can pay a great deal more to employees. He insisted that CEOs earn 355 times as much as the median worker and repeated Amcu’s demand for a minimum entry wage for the industry of R12 500 a month. Mathunjwa argued, either manipulatively or naively, that because there are fewer workers in the industry (thanks to the commodities crunch) more money per head is ‘available’ for wages increases.
Mathunjwa is wrong on almost every point of argument but above all he is wrong to link two remuneration issues that are inevitably driven by entirely different considerations. Mineworkers join trade unions like Amcu precisely because the skills they have to offer are so easy to find that they need protection from the tide of replacements who would, in the absence of such a barrier, flood the market. Anyone who has ever stood outside the mine labour recruitment office in Maseru and witnessed the disappointment, indeed sullen anger, of those many applicants who do not find places, would understand that the supply of unskilled potential mine labour in Southern Africa can to all intents and purposes be considered unlimited.
The supply of potential mining executives is a very different matter. Not many measure up to the job requirements. In addition to what might be regarded as the standard set of technical mining and financial skills, mining CEOs face an awesome range of responsibilities. Sibanye Gold’s 2015 Integrated Annual Report lists 55 factors to be managed, ranging from international macro-economic and political factors to details of the mining operations.
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In South Africa mining executives face a politically hostile government, a complex yet uncertain regulatory environment, unnecessary punitive Section 54 safety stoppages, militant labour, declining ore bodies, expensive local capital, high input costs (including energy), environmental management, JSE’s reporting requirements (rated the best – in other words, most rigorous, of any country – by the World Economic Forum), increasing shareholder activism, Black Economic Empowerment, the need to deliver social, housing and services infrastructure in order to maintain their ‘licence to operate’, and at the same time keep an eye on global commodity prices and market dynamics.
Given the current pressures on the mining industry, it is not enough for CEOs to be merely technically competent across these metrics. Of course they need technical competence but this needs to be combined with strategic qualities, especially an ability to deal with heightened uncertainty. It is no longer possible to run a mining company as a big production machine as it was during the boom. Successful mining CEOs now will be implementing radically different visions of their companies and taking their people along with them in the process.
In the present era, the skills set required by a successful mining CEO is rare. Deloitte’s 2016 Report on Executive Directors and Remuneration, published in July, bases its data in the mining sector in South Africa on just 60 individuals. This would suggest that there are probably only a few hundred people in South Africa with the skills sets to run a JSE-listed mining company and many of those individuals will already be employed in other industries.
Indeed, considering their responsibilities, mining executives in South Africa are underpaid. Stripped of the two extreme outliers – Mark Cutifani of Anglo American (R67 million per annum) and Andrew Mackenzie of BHP Billiton (R56 million) who both run truly gigantic multi-nationals – their average remuneration package is substantially less than that of their JSE counterparts. Little has changed since the Chamber of Mines commented that the 2014 CEO pay packages of Harmony Gold, AngloGold Ashanti and Sibanye Gold averaged a mere 11% of their North American peers. Moreover, cutting CEO remuneration of these three companies would be little more than symbolic as it accounts for a mere 0.03 percent of their overall wage bills.
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Mathunjwa would seem making rhetorical claims in an effort to justify an aggressive stand, something he needs to do to attract new members from the rival NUM. His account of the wage differential in mining is so exaggerated as to be absurd. The most recent available figure for the ratio between CEOs and the median worker in the South African mining industry was calculated by Moneyweb and published in December last year. The guaranteed package (excluding bonuses) of CEOs across the whole industry is 37 times that of the average ‘rank and file employee’ or ‘median worker’. With executive bonuses factored in the ratio rises to 55, one seventh of the figure given by Mathunjwa.
This might still seem like a lot to the layperson. The mining industry is aware of this perception problem and many executives have moved over the past two years to address it. With only a few exceptions, mining CEOs took salary increases lower than those offered to their ordinary employees last year. Both Terence Goodlace of Impala Platinum and Ben Magara of Lonmin received no salary increase nor bonus in 2016. AngloGold Ashanti’s Srinivasan Venkatakrishnan turned down increases in both 2014 and 2015. However real progress in reducing the earnings differential in South African mining hinges on mechanisation and more skilled workforces, factors that will lead to additional job losses and thus pain for organised labour. Executives will receive performance bonuses for managing this task but these will be hard earned.
Executive pay is a soft target at present. Most of the media is unsympathetic probably because journalists tend to identify with other salaried employees, not management. But slashing the earnings of those tasked with managing the on-going changes in South African mining is no kind of answer. The future of the industry with all its knock-on benefits depends on retaining the skills of this tiny pool.
- David Christianson is a former academic, banker and financial journalist. He was African Business Journalist of the Year in 2006. He currently consults in a number of development fields in sub-Saharan Africa including regulation, local economic development, small business and business linkages. He is a former Council member and currently consultant to the IRR.
