The amended Companies Act, which includes the proposals which were included in the Companies Act Amendment Bill (CAB) has been gazetted but not yet promulgated, with no implementation date announced, leaving companies uncertain about compliance for the upcoming financial year. This lack of clear communication is concerning, and companies with June or July and upcoming financial year-ends have been left in the lurch. They must decide whether to adhere to the King IV version for their remuneration policy and implementation report or to implement the amended Companies Act, which mandates changes to the policy, the implementation report, and a shift from advisory to binding ordinary resolutions.
If a Remuneration Committee (RemCo) receives two consecutive “no” votes (50% or more), the members must step down, necessitating the election of new committee members. Notably, this requirement does not extend to other Board Committee members, even if shareholders are dissatisfied with their performance. This inconsistency, along with new disclosure requirements, raises several concerns. Khokhela has identified some of the unintended consequences of the Bill:
Non-Clarity in Regulations
Unclear implementation guidelines could lead to inconsistent practices across companies, resulting in confusion and increased legal and consultancy costs.
Pay Gap Disclosure Challenges
Khokhela supports pay gap disclosures but emphasizes the need for disclosures that effectively address their intended objectives. The amended disclosures may not achieve the desired outcomes.
The requirement to disclose pay gaps between executives and other employees might unintentionally exacerbate perceptions of inequality and dissatisfaction, especially without proper context. The definition of employees as per the Labour Relations Act (LRA) includes learners and temporary workers, potentially discouraging companies from hiring these groups to avoid widening their reported pay gaps.
Complexity in Tracking Total Remuneration
The total remuneration package for CEOs often includes long-term incentives (LTIs) that are subject to performance vesting outcomes. The vesting outcomes for LTIs can change significantly from year-to-year as can the STIs. This can complicate the tracking of remuneration trends in a company and within and across industries, making it difficult for stakeholders to assess and compare executive remuneration in a meaningful manner
Outsourcing and Its Implications
To improve remuneration gap metrics, companies may outsource their lowest-paid roles, aiming to ‘’raise’’ the pay of the bottom 5% and thus improve reported figures. This practice could lead to increased unemployment among low-skilled workers and learners. Additionally, it may result in a loss of job opportunities and skills development, with broader economic implications.
Gini Coefficient and Unemployment
The Gini coefficient, which measures income inequality, includes the unemployed in its calculations. South Africa’s high Gini coefficient is primarily due to high unemployment rather than low wages for the employed. Increased unemployment from outsourcing could distort this metric, potentially misrepresenting income inequality and the effectiveness of remuneration policies.
Remuneration Committee Considerations
The requirement for RemCo members to step down after two consecutive “no” votes will severely disrupt planning and governance. Additionally, companies will want to separate the RemCo from HR and nomination committees. Increased responsibilities and scrutiny may also lead to higher fees for RemCo members. If the Remco is required to step down, the organisation may face challenges in ensuring a smooth transition. The scarcity of qualified, independent Board members with the necessary skills and understanding could impair the effectiveness of the RemCo, potentially leading to remuneration and governance issues that affect company performance.
Potential Impact on Talent Attraction and Retention
Increased scrutiny and restrictions on executive pay could hinder companies’ ability to offer competitive remuneration packages. This may exacerbate the skills flight in South Africa, as executives seek better opportunities abroad, potentially impacting company performance and growth.