Issue: December 08/February 09
Say on pay
The backlash abroad will have wide-ranging effects, quite likely in SA too. Public anger at remuneration excess is stirring even governments into action.
Like water, excess was once everywhere. Now there’s hardly a drop left to drink. A certain consequence of the meltdown in share prices will be meltdown of excess remuneration, in the financial-services industry for a start.
Excess in relation to what? Clearly, it’s excess in relation to value delivered. Justification of the packages paid to those who’ve wheeled and dealed into the share-price collapse is an impossibility. A wholesale review of remuneration is in the offing, as is the intervention of governments that have had to extend banking bailouts and of sometimes-conflicted institutions that represent investors such as retirement funds at the coalface of corporate engagement.
There can be no denying the public outrage, strongly articulated by Barak Obama and Gordon Brown among other political leaders knowing when they’re onto a good thing, at levels of salary and bonus combinations that have become obscene. But this has so far been looking at it mainly from the top, at the Lehmans and Merrills of this world, less through the ranks where the indulgence has permeated. The resistance happening abroad will spread to SA, as it usually does in one way or another.
For worldwide the principles, if that’s what they can be called, are the same:
Then, there’s the sheer reasonableness of amounts. “There comes a point where remuneration levels are patently insane”, opines a veteran SA banker. “The climate must change by company boards’ remuneration committees avoiding approval of what will incense the public.”
Some of the worst excesses have been in investment banks. But now jobs are rapidly being shed and the supply-demand pattern is changing. One forecast is that 100 000 banking-related jobs in New York and London will be lost by end-2009. There’ll be thousands of talented youngsters and others competing for jobs across the world within the industry, or leaving it for deployment of their skills outside it.
Changes proliferate along the chain. Bank profits have dampened, so pools for pay are depleted. As corporate profits are squeezed, so are personnel expenses. As more talented and skilled people fear that their jobs are threatened, so pay pressures should reduce.
Moreover, as the spiral in the financial sector goes into reverse, so the effect becomes more widely felt. Where traders were earning more than their bosses, the ratchet effect had been ever upward. And where the bosses had to disclose their remuneration in annual reports, the ratchet went further upward because it became the benchmark for comparison with bosses in the industrial sector, which in turn became the beacon for labour demands. And so on.
The political pressure is on. In the US, the Treasury has made aid conditional on banks ensuring that bonuses for senior executives “do not encourage unnecessary and excessive risks”. Golden parachutes have been banned. It’s the first time that the US government has intervened on private-sector pay.
In the UK, the Financial Services Authority has identified bad practices it expects banks to avoid. These include bonuses paid entirely in cash, or based on current revenue without regard to risks or long-term results.
It doesn’t end with banks and governments. The backlash against excess appears to have strengthened the backbone of institutional investors to challenge executive remuneration across the corporate sector. Powerful institutional investors are increasingly opposing salary plans that they believe are not in shareholders’ interests. A focus is where salary and bonus packages don’t align with creation of long-term value.
An indication is in research recently concluded by RiskMetrics. It showed that, among the 715 European companies surveyed, 108 motions proposed by their boards were defeated. The level of dissent (votes against a motion and active abstentions) was 9% against proposals for share-incentive plans. And this was during the first half of the year, when the markets were still pumping.
If these are early-warning signs for the boards of SA corporates, good.