Why companies should report what CEOs and workers earn

Newswise — 6 November 2023 - Changes in the law will ensure that companies can’t go on ignoring inequalities in earnings and wealth in South Africa.

Inequality in South Africa is high, whether measured by income or wealth. One of the results is that there’s acute public scrutiny of executive compensation.

This is understandable given that the skew in rewards for executives compared with wages of workers is one of the key drivers of rising inequality – in South Africa and across the globe.

Drawing on recent publicly available data, we undertook a preliminary analysis comparing chief executive officer (CEO) pay with average monthly pay ratios in the country. In our analysis CEO pay included a base salary and a variety of benefits. We then compared the CEO’s pay to the overall average monthly earning provided by the country’s statistics agency, StatsSA.

StatsSA estimates show that the average monthly pay for all workers, regardless of their sector of employment, was R23,640 (about US$1,280). We acknowledge this number is a high figure, no doubt driven up by the dynamics of South Africa’s labour market – high unemployment levels and high income inequality. The high figure had the effect of lowering the pay ratios, making them look better than they might actually be.

Using a sample of companies across various sectors of the economy our analysis showed that CEOs earn between 150 and 949 times more than the average pay of all South African workers.

Our findings are important because they shed light on inequality within firms – a key component of inequality in society in general.

We submitted our findings to hearings in parliament on two bills tabled earlier this year – the Companies Amendment Bill and the Companies Second Amendment Bill. If passed, the bills would make it compulsory for companies to disclose their pay gap ratios. The aim is to encourage adequate disclosure so that all stakeholders have sufficient data to make informed decisions.

We are in favour of the bills because it will mean that companies can’t go on ignoring inequalities in earnings and wealth in South Africa. Disclosures will also provide other social actors with evidence to question inequalities within firms, and demand changes.

Our analysis differs from previous work. For example, one analysis focused only on pay ratios of companies in consumer products and services and another only on state-owned entities. There’s also a study that describes the relationship between corporate performance and CEO pay.

We saw a divergence between the earnings of CEOs employed at locally owned compared to transnational firms. There was also a difference between CEOs in privately owned companies and those at the helm of state-owned entities. We also found differences in earnings across and within sectors.

And we found there was a weak correlation between the CEO’s pay and their sector’s overall contribution to economic growth and employment share. For example, the remuneration gap in the mining sector is high yet the sector’s contribution to GDP and employment share has declined in the post-1994 period.

Changes to the law

The purpose of the bills tabled by trade and industry minister Ebrahim Patel is to improve the ease of doing business, clarify uncertainty and reduce bureaucratic red tape.

The changes also include clauses that would make remuneration disclosures mandatory for public companies and state-owned entities.

If the bills are passed, companies will be required to list the remuneration and total benefits received by the highest earning individual and the lowest earning employee.

Additionally, companies will be required to calculate a remuneration gap, defined as the ratio between the total remuneration of the top 5% highest paid individuals and that of the lowest paid 5%. This must be calculated at both the median and mean to avoid any distortion by outliers.

What’s missing

Based on our findings and the research we’re involved in, we argue that the bills don’t go far enough. There are gaps that need to be plugged for them to be truly effective.

The law should require firms to report the wages of the lowest paid person regardless of whether they are employed internally or outsourced. This isn’t the case at the moment.

This is important because employment growth in South Africa over the past 30 years has largely been in temporary employment services.

Pay disclosures in the US allow for both categories of workers by recommending that firms with more than 100 employees hired through a labour contractor should file two separate reports, one for individuals paid via the firm’s payroll and a separate one to include outsourced workers. South Africa should adopt a similar threshold.

Secondly, the current version of the amendment is a missed opportunity to legislate reporting on gender pay gaps at the firm level. This is already in place in Germany, the UK, Australia and New Zealand.

Despite an increase in female participation rates in the labour markets, female workers continue to face discrimination. Female workers earn R70 on average for every R100 earned by male workers. These pay disparities along gender lines persist even when we account for worker characteristics by including age, educational attainment levels, experience, sector or industry and occupational characteristics.

We recommend the inclusion of payment disclosures along gender lines.

Thirdly, it is important to include the base pay made to the highest and lowest earning individual together with any short- and long-term benefits. This is because in some industries the base pay is low relative to the total package earned by executives.

While it is important to include both base pay and other short- and long-term benefits, we believe that the listed payments are not exhaustive. We propose the inclusion of the following:

• any tax-deductible expenses paid by the company on behalf of the highest and lowest paid individuals

• compensation for loss of office paid to or received by any individual together with any other payments relating to termination of services.

The proposed amendments do not specifically state whether in addition an individual remuneration gap will be calculated between the highest and lowest-earning individuals. We recommend that this calculation is specifically included.

Imraan Valodia, Pro Vice-Chancellor: Climate, Sustainability and Inequality and Director: Southern Centre for Inequality Studies., University of the Witwatersrand and Arabo K. Ewinyu, Researcher, Southern Centre for Inequality Studies, University of the Witwatersrand