Executive pay and the ever-growing wage gap – what is fair and equal?

The wage gap is a huge bone of contention in South Africa, a country notorious for having one of the highest Gini coefficients in the world. The Gini coefficient is a measure of inequality, and it is a well accepted fact that the gap between executive remuneration and the lowest paid worker can sometimes be separated by hundreds of multiples. Trying to understand the wage gap by analysing executive remuneration from all aspects of output and value is, Gerald Seegers, Head of Human Resources Services for Southern Africa at PwC, he is joined by Executive Chairman of P.E. Corporate Services, Martin Westcott. What is truly equitable, and where does the balance lie between socialism, capitalism and a nation that has a long way to go in gaining a globally competitive edge in its labour market? – LF

ALEC HOGG: According to PwC’s sixth edition of ‘Executive Directors’ Remuneration’ Report, executive pay is being focused on from all angles and CEO’s recognise that pay-for-performance models need to be revisited. Gerald Seegers is the PwC Head of Human Resources Services for Southern Africa. Also in the studio is Martin Westcott, who is the Executive Chairman of P.E. Corporate Services. Gents, I think the conclusion – and Gerald, maybe we can start with you because it’s your report – is that this gap is growing, the gap between those at the top and those bottom.

GERALD SEEGERS:  Yes, it’s interesting that you say ‘is there a conclusion’. I’m not sure there is a conclusion yet around it and it’s exactly as you alluded to in the beginning. CEO pay/Executive pay is coming under an enormous amount of focus from all angles and the question is what you’re unpacking in terms of what is really right and what is wrong. I suppose even though the gap is widening, the question is ‘well, is that really relevant’.

ALEC HOGG: It’s relevant – politically.

GERALD SEEGERS:  Well, exactly. I think a lot of it is used from a political perspective… It’s a great thing for governments and regulatory bodies in that its rich pickings for them to pick up on this executive pay. We argue, particularly as consultants measuring the pay gap may not be the only solution and there’s a host of others. The one thing that came out quite strongly in our report again, apart from the levels of pay and the disparity that is growing, is this question around the regulatory environment. The one thing I think in South Africa that we’re fortunate – and I hope we’ll stay that way – that we remain a relatively self-regulatory environment, rather than having regulation imposed on us.

ALEC HOGG: Martin, from your side, have you seen the attention being paid on executive remuneration at any time in the past, as is happening right now?

MARTIN WESTCOTT: There is more attention now certainly, Alec. REMCO, as a remuneration committee, is concerned about the issue. I think it comes from the great deal of noise you get obviously, from issues like Marikana etcetera.

ALEC HOGG: You have guys on strike. They have no food, and then the CEO of one of the companies that they’re striking against gets a R17m bonus and says ‘well, I work for my money’. There seems to be more than noise going on here.

MARTIN WESTCOTT: Yes, I’d accept that. There’s a great deal of concern, as I say, and REMCO are paying attention to that. I think we also need to recognise that that wage gap issue is not solely a South African issue. We have an acute case of it. For example, if you look at two of the bestsellers in 2013: one of them was ‘Capital in the 21st Century’ by Thomas Piketty, which you will know well and the other was ‘The Great Debate’ by Agnus Deaton. Both of those issues talk about the wealth gap and the issue of the wealth gap, and they really get back to the capitalism versus socialism debate.

ALEC HOGG: Maybe and maybe not. What do you make of Ketso Gordhan saying he’s going to earn forty times what the lowest worker earns, rather than 140 or 1000 times?

GERALD SEEGERS:  That’s one of the responses. I do think that’s still relatively short-term. It’s a positive message that’s coming through.

ALEC HOGG: Why is it short-term?

GERALD SEEGERS:  The question I’ll keep coming back to is ‘is the pay gap relevant’. The question I have is making sure that at the top end the guys are earning what they are really worth. I think in South Africa, they are earning that and I’m talking particularly around guaranteed pay. At the other end, it’s making sure that at that end, the guys’ quality of life hasn’t deteriorated and to the extent that it hasn’t deteriorated, we’re doing well. If it’s deteriorated, then there’s something wrong.

ALEC HOGG: I want to pick that up with you. Are the guys actually earning what they’re paid? I ask this because my dear friend Gerry Schuitema says there are really two types of executives: there’s the value-adding executive who starts a business and grows it (a Brian Joffe or a Johann Rupert). Then there’s the professional manager who kind of gets there because he’s hung around for a long time, and he gets paid what the other guy gets paid.

MARTIN WESTCOTT: Yes, and you’ll always find that. You’ll get a great disparity in skills and contribution to the economy. Performance pay is meant to address that, but it doesn’t always do it precisely because you’re dependent on how the performance pay scheme is structured etcetera. I think that more of the real issue, Alec, is what we do about it. Gerald’s alluded to regulatory reactions if you like, on the part of government or whoever. We’re currently talking about it in terms of ‘well, maybe we should cap executive pay or tax people more heavily’ etcetera or ‘maybe we should pump up what people at the bottom of the organisation are earning’. I don’t think those are the right approaches. I think they are short-term. What we really need to be doing is getting much more buy-in from the unions and the workforce generally, around improving productivity and continuously improving year-to-year.

ALEC HOGG: It’s what Dali Mpofu was saying – he was saying ‘trust’. The trust doesn’t exist, so where do you get the buy-in if you don’t have trust?

MARTIN WESTCOTT: I think a starting point for example, is to look at how we structure remuneration. There’s absolutely nothing wrong in getting union buy-in to pay for performance because it gives you the opportunity to greatly increase what people are getting.

ALEC HOGG: You deal with remuneration committees. Warren Buffett says there are too many Cocker Spaniels who wag their tails when the chief executive comes in and not enough Dobermans. Do we have any REMCO’s in South Africa with Dobermans on them?

MARTIN WESTCOTT: We have more with Dobermans, but we’ve been short of Dobermans in the past. There’s no doubt about that and it’s been an old boys’ club for many years, but we are progressively getting people with greater concern, greater insight, and greater challenge in those communities. However, it’s not widespread. I would accept that.

ALEC HOGG: Gerald, where are we going to get more Dobermans from?

GERALD SEEGERS:  Martin and I both consult to REMCO’s, so I think that’s where we’re learning. We need to look at what the corrective actions are here and just picking up on Martin’s point, I think we need to move into a culture where there is a bit more gain sharing in the workplace. At the top end, it’s all about making sure it’s driven by profitability. At the other end, it’s more about gain sharing based on productivity – two distinct measures, but I think that’s what we’re learning. What we can’t have is unions preventing people from coming to work.

ALEC HOGG: You’re taking a huge leap there but Gerald, I think you’ve made a point – Martin, as well – more trust. My goodness, it’s needed all over in the workplace and I’d like to see a few more Dobermans. I’m not so sure there are that many or as many as we need in South Africa. You get chief executives who don’t perform and don’t give their bonuses back. They keep banking their bonuses and we’ve seen some massive wealth destruction. David Shapiro and I were talking about it just this morning. Who carries the can for that? Unfortunately, not the person who was in the position of responsibility. It’s a long subject and we got some good insights there from Gerald Seegers – he’s the PwC Head of Human Resources Services for Southern Africa – and from Martin Westcott, who’s the Executive Chairman of P.E. Corporate Services.

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