Dr Chris Blair, CEO of 21st Century
On June 17, the GECN Group of companies proudly hosted an in-depth panel discussion featuring the leaders from the GECN companies around the world in Toronto, Canada. This diverse panel included Farient Advisors (US & UK), HCM (Europe), Guerdon Associates (Australia and New Zealand) and 21st Century, representing South Africa and Africa. In this discussion, we explored various global executive remuneration and governance topics. Despite working with companies in different geographies, with unique operating environments and stakeholder perspectives, there were many similar client experiences and themes. Three key themes emerged that this knowledgeable panel explored; namely, aligning with organisation needs, pay for performance and environmental, social and governance (ESG).
Aligning Executive Pay with Organisation Needs
An overarching theme is the need to address the tensions between good governance and the views of proxy advisors (such as ISS and Glass Lewis) with the need to attract, retain, and engage the right talent. Robin Ferracone at Farient summed it up well: “It’s almost this collision course that’s going on between doing something special outside the plans for somebody – for example, if I pay them above the 50th percentile – is that going to be a problem as it collides with standards of good governance.”
Organisation needs differ across geography and industry. For example, in South Africa, there has been a growing emphasis on retaining talent within the technology and AI sectors due to the country’s burgeoning tech ecosystem. Amanda Voegeli at Southlea indicated that turnover and talent demands are stabilising in some regions like Canada, in contrast to regions like South Africa, where the “war for talent” remains pronounced in specific high-demand areas. This tension becomes particularly significant in growing companies that need to retain and promote key talent in these hot skill areas.
Boards continue to struggle with the interpretation of market data. In South Africa, there is a growing trend of companies applying more judgment when interpreting market data to account for local market differences. Each year, companies must get the overall remuneration budget approved, and these budgets tend to remain fairly stable year-over-year. Robin reinforced the need to get pay positioned appropriately within reasonable guardrails so that you “can let performance take care of whether the pay outcomes are high or low.”
From an investor perspective, challenges persist as it is easier for portfolio managers to follow proxy advisors ISS and Glass Lewis rather than develop their own policies. Stephan Hostettler at HCM noted that portfolio managers in Switzerland often do not fully agree with proxy advisor policies. They have different priorities and objectives, reinforcing the need to understand your shareholder base and their preferences. This is equally true in South Africa, where local investors might have specific governance expectations unique to the region.
Chris Blair from 21st Century commented that at the same time, Remuneration Committees face expanding responsibilities. In South Africa, this includes addressing the significant wage gap and the inequities between top and bottom earners. Many larger companies are adopting living wage policies, and this trend is expected to grow. Gabe Shawn Varges from HCM noted that these expanding responsibilities are part of a broader global trend, raising questions about the changing profile of Committee members relative to what was required in the role 10 to 15 years ago.
Pay for Performance
Michael Robinson at Guerdon noted that “boards are trying to discern their way through the fog of what actual performance is and how good they are versus the hubris that management puts up about their performance.” South Africa has an increasing focus on linking executive pay to tangible performance metrics. Research among South African and Australian companies has shown that while there are consistent outperformers in terms of sustained levels of return on capital and/or earnings growth, this does not always translate into total shareholder returns (TSR). Therefore, it is essential to understand performance beyond TSR and effectively communicate this to investors.
There are ongoing discussions on the use of relative and absolute performance, with many perceiving proxy advisors advocating for a greater emphasis on relative performance. Globally, boards are considering combining relative and absolute TSR to address different investor perspectives on good performance. Amanda outlined the use of “Market Share Units” (MSUs) as a potential replacement for stock options. MSUs vest based on absolute TSR over multiple years (e.g., years 3 to 5), which can address challenges in smaller markets like South Africa, where relative performance comparisons can be difficult.
These discussions are also becoming more integrated with executive share ownership. In South Africa, there are many boardroom debates on how to reinforce more real share ownership tied to actual wealth creation instead of the historical focus on aligning a fixed multiple of salary and the inclusion of unvested share units. South Africa appears to be in line with Australia and Europe, where there is a greater emphasis on real ownership. Some South African companies have adopted share matching programs that have been well received by investors and executives as a way to support retention and encourage real share ownership.
Environmental, Social, and Governance (ESG)
Robin commented that “while we hear lots of discussion on ‘the backlash’ to ESG, companies continue to develop and refine their sustainability strategies and they do want to push on some of those objectives within the incentive plans.” In South Africa, there is a significant focus on addressing environmental and social issues, such as reducing greenhouse gas (GHG) emissions and promoting social equity. A notable example is the mining sector, where companies are under increasing pressure to demonstrate sustainable practices and community engagement.
Michael noted that the Australian economy is very similar to Canada, with a large focus on GHG emissions reduction. In South Africa, boards face similar challenges in addressing the time required to make meaningful progress against longer-term ESG goals. Most companies need to invest significant capital expenditures on GHG-reducing activities rather than other more immediately productive assets, which can impact TSR over the short term. This creates challenges beyond the decision of whether to include ESG measures within incentive plans but also in recognising the impact these sustainability investments can have on future financial and market returns.
South Africa is still developing in its ESG maturity, with larger global companies demonstrating market-aligned practices and smaller local companies addressing more pressing issues like social needs. Timing challenges and different expectations from ESG activists relative to shareholders are significant. Chris Blair, CEO of 21st Century, stated: “We will probably need to see a meaningful increase in the weighting of ESG within incentives to encourage executives to prioritise strategies that drive positive ESG outcomes.”
In conclusion, aligning executive remuneration with organisational needs, linking pay to performance, and integrating ESG considerations are critical components of modern executive remuneration strategies. These themes resonate globally and are particularly pertinent in South Africa’s unique economic and social landscape. As we continue to refine these approaches, understanding the local context and investor expectations will be crucial in achieving balanced and effective executive remuneration practices.
ENDS
