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EY’s third Remuneration Governance Survey

Clear trends emergeWhen EY’s first Remuneration Governance Survey took place in 2012, remuneration was becoming a hot topic, sparked by the financial crisis of 2008. The Companies Act of 2008 and the King Report on Governance for South Africa in 2009 had also opened the doors for shareholders and the media to access remuneration information freely.

This third survey shows that in response to shareholder interest, remuneration committees are starting to come to grips with their roles. Five clear trends are emerging that are consistent across the three years, and look set to dominate the remuneration agenda, at least over the foreseeable future:

The data show that institutional shareholders and shareholders generally have become and remain more active in the remuneration affairs of the organisation—perhaps because they are seeing results. While fears remain that increased disclosure of executive pay might have negative, unintended consequences, the key take-out is that increased scrutiny and thus better governance around executive pay is gaining support: 80 percent of respondents believe that increased corporate governance should reduce problematic pay practices—almost double the 43 percent recorded in 2012.

Shareholders are more active…

Figure 1: Shareholder activism is here to stay

Do you agree with the following statements? (% answering yes)

0% 20% 40% 60% 80% 100%

78%82%

80%73%

75%84%83%

50%65%

53%

43%

2014 2013 2012

Institutional shareholders, specifically, have become more active in the remuneration affairs of the organisation

Increased corporate governance should reduce pay practices that may be perceived as problematic, such as

change in control payments, severance payments, guaranteed bonuses and ‘pay for failure’

Shareholders, generally, have become more active in the remuneration affairs of the organisation

Increased disclosure of executive pay will have unintended consequences, such as: the disclosure of sensitive

information or the disclosure of competitive pay practices of the ‘ratcheting up’ of executive pay

2

3

…perhaps because they are seeing results. Shareholder engagement is influencing pay practices

That sustained shareholder interest in executive remuneration could be linked to results is suggested by Figure 2, which shows that remuneration committees are proactively engaging with shareholders before annual general meetings. Critically, they are making changes to pay programmes as a result of this engagement–43 percent said they had made changes, as compared with 29 percent in 2012.

The top focus area for remuneration committees is linking pay to performance…

The data clearly shows that remuneration committees continue to focus on ways to link executive pay to performance (Figure 3), and that some performance measures are beginning to dominate (Figure 4 and 5).

When it comes to short-term incentive schemes, profitability measures are the most popular measure used (71 percent), closely followed by individual targets (57 percent) and earnings per share (43 percent).

By contrast, long-term incentive schemes tend to favour earnings per share (57 percent), return on capital employed (51 percent) and total shareholder return (47 percent).

Figure 3: Focus areas for remuneration committees

Figure 2: Shareholder engagement is influencing remuneration practices

% who answered “yes”

Areas of “More” focus in the next 12 months

2014 2013 2012

0% 10% 20% 30% 40% 50% 60% 70%

‘Claw back’ provisions

The Remco Charter (terms of reference)

Pure retention schemes (i.e. with no performance element)

The independence of remuneration consultants

Review of proxy voting guidelines of institutional investor

Bonus deferral provisions

Co-operation with other board sub-committees, such as the Risk

Peer group identification for remuneration benchmarking

Capabilities of Remco members

Links with enterprise risk management

Remuneration benchmarking methodology

Reward strategy changes

Quality of information (breadth and depth) in the annual remuneration

The ‘wage gap’

Shareholder dialogue / engagement

Short term incentive scheme design changes

Share based incentive scheme design changes

Long term cash incentive scheme design changes

Performance conditions for incentive schemes

Links between pay and corporate performance 65% 50%

54%

53%

52% 40%

40%

40% 30%

31%

29% 26%

26%

25%

23% 17%

17%

19%

13%

13%

9% 7%

0%

37%

12% 0%

0%

27% 33%

38%

14% 32%

35% 32%

34% 29%

43%

39% 38%

52%

52%

44%

44%

36%

36%

42%

42% 0%

29%

46%

21% 62%

49% 46%

55%

2014 2013 2012

20% 40% 60% 80%

51%

48%

19%

29%

54%

29%

15%

22%

Did your Remco make changes to your pay programmes as a consequence of

engagement with shareholders?

Did your Remco take steps to proactively engage indirectly with all shareholders

before your most recent AGM ?

43%

Did your Remco take steps to proactively engage directly with your larger investors

before your most recent AGM ?

0%

Figure 4: Metrics used for linking Short Term Incentives to performance (multiple answers allowed)

4 …but non-financial metrics are still not prevalentFigure 4 and 5 highlight that financial performance measures are favoured to a great extent—only 29 percent of remuneration committees take non-financial measures into account for long-term incentive schemes. The figure is 43 percent for short-term schemes.

This trend implies that South African corporates have not yet fully embraced the broader understanding of corporate governance, which seeks to secure the company’s long-term sustainability by understanding and mitigating all the risks that threaten it—many of them non-financial. Similarly, the company’s executives should be incentivised in terms of this broader spectrum of risks.

Figure 5: Metrics used for linking Long Term Incentives to performance (multiple answers allowed)

2014 2013 2012

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Earnings p

er sh

are

Return

on Capita

l Employe

d

Total

shar

eholder

retu

rn (T

SR)

Profitab

ility m

easu

res (

e.g. E

BIT, EBITDA)

Perso

nal (In

dividual)

targ

ets

Other

non-financia

l mea

sure

s

Economic

value a

dded (E

VA)

Other

financia

l mea

sure

s, e.g

. units

produce

d

Health

and Safe

ty mea

sure

s

Cash flow

Sales /

Reven

ue / Tu

rnove

r

Environmen

tal m

easu

res

None

57%

51% 47% 45%

31% 29% 27% 27%

18% 16% 16%

12%

4%

16%

24% 24%

51%

25%

14% 10%

6% 6% 10%

20%

8%

4%

17%

24%

37% 35%

29%

24% 20% 21%

12%

21%

12% 12%

2014 2013 2012

Profitab

ility m

easu

res

(e.g. E

BIT, EBITDA)

Perso

nal (In

dividual)

targ

ets

Earnings p

er sh

are

Other

non-financia

l mea

sure

s

Other

financia

l mea

sure

s, e.g

. units

produce

d

Sales /

Reven

ue / Tu

rnove

r

Cash flow

Return

on Capita

l Employe

d

Health

and Safe

ty mea

sure

s

Total

shar

eholder

retu

rn (T

SR)

Economic

value a

dded (E

VA)

Environmen

tal m

easu

res

None 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

71%

62%57%

69%

61%

73%

43%

18%

26%

43%

35%

47%

41%

16%

29% 31% 32%

41%

27% 27%24%

18%16%

20%

26%

2%0%

10%15%

12%17%

29%33% 33% 33%31% 31%

38%

Short term incentive schemes

Long term incentive schemes

5Remuneration committees are looking for 70% support of their remuneration policyAs the survey has shown, shareholder activism is more entrenched, perhaps because it is yielding results, especially as remuneration committees are proactively engaging with shareholders ahead of annual general meetings.

The flipside of these trends is that remuneration committees seem to be setting the bar for endorsement of their policies fairly high, with a simple majority seen as inadequate. Broad consensus seems to be emerging that a “no” vote of more than 30% would constitute a rejection of the remuneration policy.

Conclusion In conclusion, the five trends emerging from this year’s EY Remuneration Governance Survey show that remuneration committees are starting to get on top of the issues, and that clear trends are starting to develop. It is to be hoped that this will continue, and that executive pay can, in time, cease to become such a divisive issue as the link between remuneration and overall corporate performance becomes tighter.

Remuneration committee agendas will remain full over the next year, according to the survey results (Figure 5). Of particular note is the focus on two areas that speak to the ongoing controversy over executive pay levels: the link between pay and corporate performance, and the “wage gap”.

It’s also heartening to note that committees will be placing much more focus on ensuring that their members have the right skills and capabilities.

ContactFor more information, contact Ray Harraway, leader of the Performance and Reward Competency for EY Africaray.harraway@za.ey.com +27(0)117725466

In your view, what level of votes at the AGM against the remuneration policy would you consider to be a ‘failed vote’?

2014 2013

More than 50% 20% 29%

More than 40% 14% 13%

More than 30% 39% 33%

More than 20% 18% 20%

More than 10% 4% 2%

Unsure 6% 2%

2012 2013 2014

Industrials 20% 27% 23%

Financials 27% 18% 25%

Basic Materials 23% 16% 12%

Consumer goods 7% 22% 17%

AltX 10% 8% 8%

Consumer Services 10% 6% 8%

Healthcare 3% 4% 8%

Total responses received 30 51 53

About the researchMembers of remuneration committees from companies listed on the Johannesburg Stock Exchange were asked to fill out an online questionnaire. The sector breakdown is shown in the table below.

This report is intended to provide an overview of key trends in and commentary on the key regulatory, governance and stakeholder issues affecting remuneration of JSE companies. It is not intended to be used as a benchmarking tool.

Survey participants by sector