1.1 Governance – US Style
US and UK capital markets have developed conventions in the field of corporate governance in the past few decades which are simple and generally effective, even if not infallible. Practitioners within SA, as an emerging undeveloped economy, should endeavour to understand these conventions if SA has to compete in international markets against and co-exist with the giant corporations which are based in the more developed economies.
1.2 The UK Model 1.3 Governance in SA
Several successive commissions have reviewed the principles of corporate governance which should regulate senior executive pay in the United Kingdom, culminating in the adoption of a concise â€˜Combined Codeâ€™. Many of these principles are also embodied in the SA code.
1.3 Governance in SA
Corporate governance in SA is on its own developmental track. It now directly affects all organizations however incorporated and plays an increasingly significant role in relation to senior executive remuneration and to how
remuneration committees will be expected to function in the future.
Appendix I: The King III Report
1.4 The Mandate of the Remuneration Committee
The remuneration committee needs to have a mandate which is compatible with the constitution of the organization, with regulations and best practice, and with the logistical resources of the organization. Questions of delegation of responsibility and power sharing also arise in drafting the charter of the committee.
Appendix I: Example â€“ Charter of the Remuneration Committee
1.5 The Functioning of the Remuneration Committee
To be effective a remuneration committee should be correctly constituted. It must then conduct its meetings with a focused agenda towards clearly-defined end-objectives.
1.6 The Nomination Committee
A separate nomination committee is sometimes established to focus on the composition of the board with a view to
making it optimally effective. Its mandate may be extended to focus on talent management and succession within the
top management team.
Appendix I: Charter of Nomination Committee
1.7 Fiduciary Duties and Conflicts of Interest 1.8 Remuneration Committee Self-evaluation
One of the primary functions of a remuneration committee is to ensure that conflicts of interest are identified and managed properly; which will include laying down appropriate rules and a code of conduct if necessary. One of the other roles of remuneration committees today is the review of the safeguards against the occurrence of situations
in which individual senior executives receive financial gains which they have not earned and do not merit.
1.8 Remuneration Committee Self-evaluation
The remuneration committee should conduct a stringent self-evaluation review as part of its annual programme and
make recommendations to the board concerning its future role and mandate, and the shareholders compact.
Appendix I: Corporate Performance Disclosure
1.9 Directors Fees
The fees that are paid to directors for their services as director and for adhoc attendances need to be approved by shareholders annually in advance. We examine different approaches in determining the fee levels and in regulating
2.1 The Remuneration Policy Framework
The board of every corporate entity has to approve and obtain the approval of shareholders to a â€˜remuneration policyâ€™. This will contain basic information defining how remuneration is to be managed, and how variable pay will
be determined and paid, at all levels. This policy statement now represents the formal and contractual basis for
profit-sharing, and as such will closely define the economic partnership between shareholders on the one hand and
managers and staff on the other.
Appendix I: Remuneration Policy Statement
Appendix II: The Remuneration Report
2.2 The Review of Remuneration Policy
The new â€˜remuneration policyâ€™ required by King III needs to be reviewed annually by the remuneration committee as
part of its brief. Questions arise as to how the remuneration committee should approach this task and to this end interact with management. A suggested checklist of steps is presented in this chapter.
2.3 Attracting Management Talent
The board will need to approve a strategy by which the company as employer will be able on an ongoing basis to successfully attract, motivate and retain a top management team. Talent management considerations will play an important role in the formulation of this strategy.
2.4 Retaining Top Management
The company will of course continuously need a top management team at its helm absolutely committed to the achievement of its objectives. A steady and planned through-fl ow of management talent is also good. What it does not need is to have one of its senior executives poached by a competitor or a management walk-out. A â€˜retention strategyâ€™ will counter these risks.
Appendix I: Deferred and lump-sum remuneration
2.5 The Performance Management System
A more intense focus on accountability translates in practice into a sharper focus on the performance of the individual senior executives comprising the top management team. The disclosure of the key performance areas of individual senior executives facilitates a better understanding by the remuneration committee of succession and risk
Appendix I: Position profiles of senior executivesAppendix II: Example: A performance contract
3.1 The Total Package
It is a worldwide convention today to negotiate the pay of senior executives on the basis of an annual total all-inclusive remuneration package. Doing so may affect terms and conditions of employment at the time of conversion, but are beneficial to both parties in the long run.
Appendix I: Remuneration Package documentation
3.2 Benefits within the Package
The quantum and scale of employment benefits to be granted to senior executives is important in providing them with all of the necessary productivity tools and travel facilities that are essential for them to render their services;
also in enabling them to insure against unforeseen calamities.
Appendix I: Computing a travel allowance
Appendix II: Compiling a senior executive package
3.3 The Management of Guaranteed Pay
Benchmarking and merit increment grant policy go together in regulating the quantum of the guaranteed pay package. Both need to take into account individual competency growth and special talents.
Appendix I: Example of policy guidelines
Appendix II: Example of pay progression
4.1 Short-Term Incentive Incidence and Form
The remuneration committee will be required to review the short-term incentive schemes affecting senior executives
at annual intervals as part of its brief. This mandate will normally be extended to cover all other schemes which affect the normal fl ow of profits through to shareholders, or, in the case of non-profit organizations, any additional contribution called for to cover incentive remuneration.
4.2 Principles of Incentive Scheme Design
Incentive scheme design is important if the scheme is to be successful in influencing the behaviour of senior executives. There should in all cases be a focus on both team and individual performance. The interests of the
management team should always be aligned with those of the shareholders. The rewards should always be self-fianced by additional value created.
4.3 The Performance Bonus
A performance bonus may be paid annually in arrear to senior executives based on meeting or exceeding targets.
A performance scorecard is normally negotiated for these purposes comprising a combination of individual
and organizational key performance areas and job-related factors.
4.4 Profit-sharing and Gainsharing
Both profit-sharing and gainsharing can be used to achieve the motivational alignment of the interests of the stakeholders of the enterprise. It may fall to the remuneration committee to develop recommendations on the funding of these dispensations.
Appendix I: Example: Super-profit sharing determination
5.1 The Case for Share Participation
The historic evolution of share participation is important in the context of the economy, its labour market and its social character. What works well in one country may not work well in another.
Appendix I: Example: Share purchase scheme
Appendix II: Share award scheme
Appendix III: Example; Founder share scheme rules
Appendix IV: Case Study: City Lodge Scheme
Appendix V: Case Study: Cashbuild
5.2 Senior Executive Retention Strategy
Given the criticality of succession planning as a risk management control issue, the remuneration committee needs to develop a broad approach or strategy by which it can continuously monitor the risks and report thereon to
the Board. It almost certainly needs to interact with both the CEO and the HR Executive to this end.
5.3 Share-Based Incentive Schemes
The most common motivation and retention strategy found within commercial concerns in SA today for senior executives involves the granting of share options or the equivalent in share-based rights to them, aligning their interests with those of shareholders and providing them with an opportunity to earn substantial rewards if shareholder value is created.
Appendix I: Example: share appreciation rights scheme
Appendix II: Example: Restricted rights share scheme
5.4 The Taxation of Share Schemes
Share-based schemes should be designed so as to be compatible with legislation and regulations limiting the finance that is provided, in this way optimizing the impact of taxation on employer and employee.
5.5 Valuing Long-term Incentive Grants
Long-term incentives, whether in cash or shares, need to be valued in order to control the cost thereof and also to account to shareholders properly. Some of the methods used are explained in this chapter and illustrated in appendices to the chapter.
Appendix I: Example: Valuation of share option grant
Appendix II: Valuing non-traded shares
Appendix III: Deferred and lump-sum remuneration
Appendix IV: Example: Valuation of deferred bonus schemes
6.1 Sources of Data
Our JSE database is described in this chapter. The division of the database into sectors and into five size categories is explained, and a listing of JSE companies by size category is appended.
Appendix I: Listings of qualifying companies
6.2 Remuneration Policy Survey
The disclosure of â€˜remuneration policyâ€™ is required by the King III report. Whilst there is no standard format for these disclosures, a lot can be gleaned by studying annual reports in terms of what is market â€˜best practiceâ€™ affecting both guaranteed and variable pay policy.
6.3 Disclosure of Levels of Remuneration
The remuneration of executives of JSE listed companies as disclosed in annual reports is extracted and analyzed by
function, sector and size, recording also the breakdown of remuneration packages across the sample; and an annual
value is attributed to share option scheme participation.
Appendix I: Executive Directors Remuneration
Appendix II: Executive Directors Equity Exposure
Appendix III: Historic Trends in Remuneration
6.4 – Non-Executive Directors Fees
The level of fees paid by companies to their non-executive directors for their services as directors is extracted and
analyzed by company size; daily rates are computed.