To be clear – I’m a capitalist. However, I believe that the reward must reflect the effort and innovation applied in achieving that reward.
For some time, corporate executive remuneration has annoyed me.
In my mind, there are only three types of CEOs:
- Founders of companies who retain the CEO role as the company expands and lists on public markets;
- Professional managers who lead transformational strategies for companies, redesigning and growing them in such a way that their actions appear highly entrepreneurial in nature; and
This article isn’t aimed at the talented visionaries and business icons who fall into the first two buckets. These people create jobs and shape industries. They deserve to drive Italian supercars and have mansions by the sea.
I told you I’m a capitalist.
Instead, this article is aimed at the caretakers. The also-rans. The people who take the reins at healthy companies and make very little difference over several years.
Every CEO in the third bucket likes to believe that he or she is in the second bucket. It simply isn’t true.
Are people REALLY that good?
I remember when Gareth Cliff left the morning show on 5FM. I was a student at the time and I really enjoyed his show, although I didn’t agree with everything he said. He left to start Cliff Central, a business that was ahead of its time.
I have no insight into how successful that venture has been. However, I do remember that there was a lot of noise made about how his fan base would stop listening to 5FM and would find ways to listen to his obscure internet-based radio instead.
Remember, this was a time long before podcasts. I think I was using a BlackBerry!
Guess what happened the morning after he left? That’s right, I turned my radio on and listened to 5FM. I don’t think I’ve listened to a single minute of Cliff Central.
My point is that there is far more to most businesses than a warm body in a chair unless the business has no inherent value. 5FM clearly has inherent value. The power of Cliff’s show lay in the distribution that 5FM brought to the table. He was good, but he wasn’t SO much better than every other DJ that the value of distribution was dwarfed by his abilities.
Most CEOs are good, but not SO good that their presence vs. another executive makes an enormous difference to the value of a company.
So why do some of these people think it is ok to be paid eye-watering amounts for average performances? Even more importantly, why are independent boards so inept at managing these egos?
Don’t get me started on “independent” boards
Steinhoff. Tongaat. EOH. If independent directors did their jobs properly, these crises wouldn’t happen. Perhaps the bigger question is: can their jobs be done?
The board packs are prepared by the executive management team. Needless to say, they don’t use slide 3 to come clean on the extent of fraud in the business. They also don’t use slide 4 to discuss the numerous problems in the business and the fact that several staff members fantasise about a version of Corporate Cluedo, where the staff do terrible things to certain executive managers in the canteen using a steak knife.
The independent directors receive the board packs and ask questions at the board meeting based on what is in the board packs. If that makes you warm and fuzzy at night about governance, then good for you. To me, it feels like a monumental waste of time and resources.
What do remuneration committees do?
Good question. In some cases, I’m honestly not sure.
Theoretically, this committee comprises of independent directors who make sure that executive compensation is market-related and fair. Expensive benchmarking exercises take place, which help specialist advisors pay off their houses.
To be fair, most companies get it right. The executives are paid a reasonable amount. I generally feel ok about cash salaries and bonuses under R10m for CEOs. That’s still a huge number and more than sufficient reward for the level of risk and sacrifice taken on by executive leaders. Remember, this excludes the value of share options, which can take total remuneration to over R20m.
For some, this simply isn’t enough. Nothing will ever be enough.
Government officials learnt from the best: the private sector
In the public sector, it’s called corruption and is illegal. In the private sector, it’s called a golden handshake and is legal.
Make no mistake – the morality is exactly the same, especially when the backdrop is an economy that has shed jobs because companies embarked on significant retrenchment programmes.
Let’s assume an executive gets a going-away present of R20m in cash. The average corporate employee probably makes around R300k a year. Instead of making a wealthy person even wealthier for literally no reason, more than 65 people could’ve kept their jobs for a year. That would mean 65 families who wouldn’t be going through financial hardship just so someone can buy another yacht.
Caretaker CEOs don’t have proper skin in the game because they don’t own much equity. They come in as professional managers and they leave as professional managers, except they are far wealthier thanks to a carefully designed suite of Key Performance Indicators (KPIs).
Worst of all, if the KPIs aren’t achieved, there’s usually a golden handshake to get rid of the executive in question. These caretakers don’t have much downside risk, yet the upside is enormous.
The investment community is fighting back against caretakers. It’s high time that the vote on the remuneration policy was taken more seriously.
An “advisory vote” is water off a duck’s back for a caretaker hopping and skipping to the Ferrari dealership.