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Factors Driving & Influencing Remuneration Policy

Factors Driving & Influencing Remuneration Policy

By Mark Bussin who can be contatcted

At at www.21century.co.za &

1. Introduction and context

At a time when hunting for the ‘next Enron’ is an international sport, companies are uncertain as to what governance decisions they should be making. The clean-up has extended to insider selling, financial disclosure, even Chief Executive Officer (CEO) pay – all issues that feed the image of corporate corruption. In South Africa many stakeholders and the media are also baying for blood and newspaper headlines like, "The fat cats are still grabbing all the cream," (Sunday Times Business Times, April 27 2003, p. 1) hit sensitive nerves. There is a rising tide of resistance against executives who take huge pay rises despite poor earnings, both nationally and internationally.

The Johannesburg Stock Exchange (JSE) will be getting tough on complying with King II, which means that organisations are in the spotlight too. Yet a recent CEO Pay Study reveals a strong, positive correlation between changes in pay and corporate performance.

The dichotomy of attraction, motivation and retention of good executives versus tough corporate governance and media spotlights, places remuneration decision-makers in a difficult position.

A company’s ability to understand the ‘drivers’ of remuneration policy and CEO pay is therefore a critical component in determining its present and future success in good remuneration governance.

Well designed remuneration systems play a strategic role by promoting organisational success in highly competitive markets in which technological change constantly influences how employees perform their jobs. Indeed, some go so far as to argue that there are strong links between remuneration system design and organisational performance.

 

 

2. Problem Definition

Committees meet several times a year to make decisions about the organisation’s remuneration policy, philosophy, CEO and director pay. The committees that make remuneration policy decisions range in nature from Remuneration Committees, Human Resource Committees, Finance Committees, Audit Committees, Boards of Directors, Owners, Advisers and Consultants. Decisions are made on the basis of experience or market benchmarking, but not really on empirical evidence.

This, the first of 2 in the series, will outline findings in construct 1 – forces driving change.

3. Key Drivers

Remuneration policy is influenced by many factors. Decision-makers usually do not know how much ‘weight’ to give each factor, and are often reactive to situations that develop. Detecting environmental signs before others is what often gives the competitive advantage. Often, the driver is based primarily on what the committee can ‘sell’ to shareholders, and hence may not be the most appropriate solution. Understanding the extent to which each of the factors drives remuneration decision-making will inform the relative weight that needs to be attached to the driver when making the remuneration changes.

Based on a sample of 148 prominent organisations, table 1 sets out the results showing the strength of factors driving change to remuneration policy in South Africa.

 

Factors driving change to remuneration policy

To a small extent

To a moderate extent

To a large extent

 

Count

%

Count

%

Count

%

Retention of key staff

8

5.4%

64

43.2%

76

51.4%

Financial results

13

8.8%

66

44.6%

69

46.6%

Strategic thrust

16

10.8%

67

45.3%

65

43.9%

Surveys / benchmarking

18

12.2%

78

52.7%

52

35.1%

Internal advisers

17

11.5%

84

56.8%

47

31.8%

Affordability / rising costs

13

8.8%

91

61.5%

44

29.7%

Productivity

17

11.5%

88

59.5%

43

29.1%

Legislation

35

23.6%

72

48.6%

41

27.7%

Board of directors

32

21.6%

76

51.4%

40

27.0%

Change in culture

34

23.0%

76

51.4%

38

25.7%

Your competitors

43

29.1%

69

46.6%

36

24.3%

Development / career progression

19

12.8%

97

65.5%

32

21.6%

Economic restructuring /

different work patterns

26

17.6%

90

60.8%

32

21.6%

Remuneration Committee

60

40.5%

60

40.5%

28

18.9%

Shareholder expectations

51

34.5%

74

50.0%

23

15.5%

Staff loyalty

32

21.6%

95

64.2%

21

14.2%

Turbulence in business environment

45

30.4%

82

55.4%

21

14.2%

Advanced technological developments

65

43.9%

66

44.6%

17

11.5%

External advisers

53

35.8%

79

53.4%

16

10.8%

Social upheaval / trade union

73

49.3%

62

41.9%

13

8.8%

Governance / King II report

46

31.1%

91

61.5%

11

7.4%

Publicity

89

60.1%

51

34.5%

8

5.4%

Investment / stock exchange analysts

106

71.6%

37

25.0%

5

3.4%

Corporate failures

112

75.7%

33

22.3%

3

2.0%

 

Table 1: Factors driving change to remuneration policy rank ordered by large extent

The top 5 factors that drive change to remuneration policy to a large extent in terms

of recorded frequency are retention of key staff, financial results, strategic thrust, surveys/benchmarking and internal advisers. Corporate failures, investment/stock exchange analysts, publicity, governance/King II report, social upheaval/trade unions drive change to remuneration policy to a lesser extent.

The estimated value for remuneration policy makers and organisations is that:

Guidelines are provided as to the forces driving remuneration policy change

The strength of each force provides a guide as to how much research and emphasis should be placed on each driving force

In the next article (second of three) we will report on which components were changed in South Africa over the last three years.

Gary Watkins

Gary Watkins

Managing Director

BA LLB

C: +27 (0)82 416 7712

T: +27 (0)10 035 4185 (Office)

F: +27 (0)86 689 7862

Website: www.workinfo.com
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