Remuneration Policy: Getting the balance right
Wednesday, 21 May 2014
The practice of South African companies when it comes to approving
remuneration policy – an advisory vote by the board – may be too ‘tame’ when
compared with the rest of the world.
That was the word from panelist David Couldridge, a senior investment
analyst at Element Investment Managers, who commented on the second position
paper* on policy remuneration by the Institute of
Directors in Southern Africa (IoDSA).
"Australian practice compels boards to stand for re-election if
remuneration policy is not approved upon the second attempt while the UK
requires a binding vote,” says Couldridge. "From the perspective of inspiring
confidence in foreign investors, I believe it’s critical that we raise our
Getting the balance right
The King III Report on Governance, upon whose practice note the latest
position paper expands, calls for companies to take into account the legitimate
expectations of all their stakeholders.
According to the paper, the stakeholder model does not give the shareholder
de facto precedence in the matter being engaged on.
"Too much shareholder involvement may hinder effective governance whilst
too little can increase the risk of misunderstanding and surprises,” says Ansie
Ramalho, chief executive officer of the Institute of
Directors South Africa (IoDSA). "Getting the balance right is critical, or else it’s not
impossible for stakeholder dissatisfaction to result in an incident like
The paper recommends implementing a strategy for engaging with stakeholders
throughout the year, well before the annual general meeting. The result needs
to be a policy that allows value to flow to all stakeholders – not just towards
executives and upper echelons - with an approach that encourages sustainable
performance over time.
"A sustainable remuneration policy needs to fit into a system of
remuneration within a system of governance,” adds Couldridge. "It’s not just
something you can make up as you go along –properly engaging with stakeholders
takes time and concerted effort.”
Who sets the policy
In addition to proper stakeholder engagement, it’s important to ensure
that their various roles regarding remuneration are understood by: human
resources, senior management, the remuneration committee, the board of
directors, the social and ethics, and risk committee.
Perhaps the most critical recommendation in this regard, according to
Ramalho, is that the people who set the policy should possess the appropriate
skills. "Those who’re deciding policy must have business acumen. They need to
understand the dynamics surrounding the performance of the company – not just
What employee levels should the policy address?
Over 70% of those in attendance at the introduction of the paper voted
in favour of the remuneration committee being responsible for approving
remuneration policy for all employees. However, Ramalho says this is not
"For the remuneration committee to have to worry about pay for each
employee is not practical,” she says. "We believe a better approach is to
ensure that a good performance management system is in place that can help
determine pay scales. This then frees up the remuneration committee to focus
more on the issue of executive and top management pay.”
How should companies deal with rejection of remuneration policy?
According to Ramalho, less than 80% acceptance should be regarded as a
warning light for companies. "Most resolutions achieve 95% support in South
Africa, so we need to carefully consider the impact of resolutions that have
less support than this,” she says, noting that less than 75% in Australia is
regarded as one strike.
"It’s also important to ensure that shareholders realise they are
required to vote on policy, not on the quantum of pay.”
In conclusion, notwithstanding the desire for best practice, Ramalho
says it’s impossible to try and implement a ‘boilerplate solution’ on the issue
"You can’t just ‘cut and paste’,” she says. "The solutions that
companies need to be working towards are with ‘best fit’ in mind – and it might
take some time to figure this out.”
*Please visit www.iodsa.co.za to download the
Remuneration Committee Forum’s second position paper on remuneration policy.