Patel’s plan to address the inequity of executive pay

Judging by the flurry of comments sparked by news that Minister of Trade, Industry and Competition Ebrahim Patel is finalising legislative changes aimed at narrowing the executive-worker pay gap, not many people believe government has a role to play in addressing this thorny issue.

As many commentators see it government has its own, much more severe, remuneration problem – totally inept employees at every level of government are being massively overpaid for generally low-quality work, in some instances no work at all.

That’s as may be. Certainly it would be a useful move for Patel to coincide his legislative challenge with news of widespread pay cuts for ministers and directors-general.

But why would he? The sad reality is that very few “overpaid” individuals in government – or the private sector – believe they are overpaid; or at least would implicitly admit to it by taking voluntary pay cuts.

Two extraordinary decades

Over the past 20 years the top level management of listed corporates, and to a lesser extent government, have enjoyed extraordinary remuneration increases.

In remarkably few cases have these increases been justified by the long-term performance of the underlying operation, whether a company, a department or a municipality.

The lucky beneficiaries of this system have one thing in common – their good fortune is being funded by other people.

Unlike the case of a private family-owned business, the largesse heaped upon executives of listed companies and government employees is paid by ‘someone else’.

In the case of listed companies it is the shareholders who shoulder the bill; for government employees it is the taxpayer. And the grim reality is that currently there is nothing within the relationship between executive and shareholder that would encourage the executive to be in any way restrained. Similarly for the government employee and taxpayer.

Gaming the system

In the case of listed company executives, any sense that these rewards may be inappropriately generous is addressed by the use of expensive remuneration consultants who are aided and abetted by headhunters and the members of boards’ remuneration committees.

In a remarkable example of self-dealing, remuneration consultants are paid generously by executives to tell the board how appropriate those executives’ pay levels are; indeed these consultants will frequently suggest that something more generous would be even more appropriate.

While Patel certainly does need to encourage government to overhaul its own pay system, that reality shouldn’t take from the fact that listed entities need to take a critical look at the cronyism that underpins its remuneration practices.

These practices do not reflect an efficient market at work; they reflect the ability of insiders to game the system in a way that steadily diminishes the very efficiency of that market.

Over the past 20 years fewer than a handful of executives – for example Bidvest’s Brian Joffe, SABMiller’s Graham Mackay, Shoprite’s Whitey Basson – have justified their generous rewards through the creation of sustainable stakeholder value.

Most of the others, who have been on the receiving end of payments that would allow several generations of their offspring to enjoy an indolent life of luxury, could have been passed over without any fear of corporate value destruction.

Held captive

Time and again, we are told we must pay these extortionate sums or risk losing great talent.

We are told this by the remuneration consultants and the members of the remuneration committees whose generous fees are tied up in that myth being sustained.

How is it possible that organisations with tens of thousands of employees are so dangerously reliant on a relative handful of individuals?

Are the boards and their human resources departments incapable of cultivating the necessary talent?

Of course it is not just the board members and the remuneration consultants who enable the system, it is the shareholders.

Shareholder impotence

And therein lies the greatest challenge – 21^st Century shareholder capitalism does not allow the ‘real’ shareholders to vote on this or any other issue, instead it is the fund managers who collect tens of billions of rands from employees and savers who do the voting.

And the executives of these powerful big fund management institutions have more in common with their colleagues in listed companies than they do with their tens of thousands of clients.

How else could the system prevail?

How else could demands for accountability be satisfied by a contrived non-binding vote on remuneration?

The problem with Patel’s plan

Patel’s critics may however be right on one key issue: government might not be best placed to address excessive remuneration in the private sector.

To date government and regulatory interventions have generated unintended consequences that have created boons for executives.

Former US president Bill Clinton’s attempt to put a $1 million cap on US executive pay in the nineties propelled the use of even more generous share options; in SA mandatory disclosure of executive pay in 2002 was expected to trigger a sense of social embarrassment that would act as a restraint on pay levels, instead it bred a near-sociopathic reliance on benchmarking to justify any pay amount imagined.

As for disclosing the wage gap in SA – judging by Anglo American’s interpretation, that might prove to be ineffective: the global mining giant decided its secretarial employees in the UK were the poorest paid workers, not the miners in any of its operations across the globe as they were in a different jurisdiction.

A better way

Rather than go the legislative route perhaps Patel should try to shake up his colleagues in the Department of Finance and get them to goad the Public Investment Corporation (PIC) into action.

As one of the country’s largest JSE investors the PIC is well placed to impose some market discipline on its investee companies.

Why it has not chosen to do anything effective so far is puzzling.

Equally puzzling is why the trade union movement has chosen not to use its substantial investor muscle to exert some influence on the issue. Instead it has been happy to allow fund managers to aid and abet the growth of a socially destabilising wage gap.

As a former trade unionist, Patel should use whatever influence he has to encourage his labour colleagues to impose some market discipline.

Meanwhile he could look to address the problem on his own doorstep.