Are CEOs overpaid?

By Monde Nkosi

Winston Churchill once claimed that all men make mistakes, but only wise men learn from their mistakes. It would appear that we, as a country, are not wise.

As far back as 2005 during a strike by the SA Commercial, Catering and Allied Workers Union, a placard read: “Sean Summers you earn R12 million but you don’t want to give us R400. It’s a shame.” And we now find ourselves back in the same situation with Vytjie Mentor, chairperson of the Portfolio Committee on Public Enterprise, finding that workers have cited high increases for management as one of the reasons for their current strike.

The facts prove that these workers are not incorrect in their belief that executive remuneration is disproportionately high, relative to the average South African worker. A study by forensic accountant Dr Phillip Theunissen revealed that it takes the average South African CEO two and a half months to earn R1 million; it takes the average paid South African worker more than eight years to do the same.

The study also finds that the situation has actually worsened since the famous 2005 placard; the average basic CEO remuneration has increased by an annual average of 19.9% since 2006, while that of the average worker increased by 15.4%.

The logic is thus quite simple; history shows us that disproportionately high executive remuneration leads to worker discontent and contributes to the reasons for strike action. This strike action cripples our basic services such as schools and hospitals, and the resultant above-inflation wage increases exacerbate the issue of unemployment in a country with (according to the Economist magazine) the highest unemployment rate in the world. This can’t be in the national interest. Yet we continue to grant executives high pay increases.

I dug deeper, however, because I reasoned that we are not inherently stupid as a country therefore there must be a reason why shareholders continue to grant executives these pay hikes. I could think of only one solid argument that explained what is happening. It is, in fact, quite a simple argument. Better paid managers are less likely to be inefficient and the costs of inefficiency far exceed the extra cost of hiring a competent executive.

This is illustrated vividly by the SAA saga. The new SAA board paid R15 million for a forensic report which found that former CEO Khaya Ngqula had allegedly misspent R141 million in sponsorship funds and another R30.8 million that the company is now suing Ngqula for. In addition to this, SAA will now incur considerable legal costs in an effort to recover the money. It is inconceivable that a competent CEO would have cost SAA this much in terms of remuneration. It is thus evident that the argument holds, provided that the better pay leads to more competent leadership.

Recent South African history, however, indicates that too often better pay does not lead to more competent leadership. Ngqula himself received a very competitive market-related salary. Other popular examples that spring to mind include Jacob Maroga (former Eskom CEO) and Sipho Shabalala (Ithala CEO), to mention but a few. This makes the argument defending high executive remuneration, quite simply, not hold in the South African context.

This brings us back to the conclusion that executive remuneration in South Africa has reached unacceptable levels and cannot be justified or shown to work in the national interest. I can only imagine the difficulty new Eskom CEO Brian Dames would have explaining to workers how his reported 91% pay rise is in the national interest when his employees had to threaten strike action to receive a 9% increase.

Highlighting problems is, however, far easier than solving those self-same problems. Now that we have identified this problem, how do we solve it?

There has been talk, globally, of capping executive pay. This is not feasible because of the obvious disincentive effect. Why strive to be a better and more efficient executive if you will be paid the same amount as a less diligent and less hard-working executive?

The answer, in my opinion, lies in accountability and transparency. In particular, involving unions (and therefore workers) in determining the performance measures upon which managers will be judged and remunerated.

This will have several lasting impacts. Firstly it will help us, as the people, judge the performance of these highly-paid executives. Secondly, having the performance measures in the public eye will give the executives extra incentive to perform. Thirdly, it may finally create the much-needed link between CEO pay and performance in South Africa which, as aforementioned, is the only basis upon which high executive pay can be justified and be in the public interest.

I call on every person who calls themselves a South African to heed my call and learn from past mistakes. Our mistakes are costly, not only to contemporary South Africa but also to the country this land will become in the future. Just ask the children sitting at home because they have no teachers at school.

Monde Nkosi is studying finance at the University of Cape Town.