Have They No Shame?

South Africa, a country which seems to have a high unemployment rate. Could this be due to there not being jobs on offer? Could this be due to BEE (Black Economic Empowerment) or AA (Affirmative Action)? Is there a lack of skills within the country or has all the skilled individuals left to migrate to other countries? Is our government really to blame for all the job loses within the country and every sector? Or, could it be the fact that CEO’s (Chief Executive Officers) our all the organizations are earning too much money? “It took CEOs in South Africa just over seven hours to make $13 194 (R180 251), which is the country’s average yearly wage.” (Fin24, 2017).

“The most common determinants for executive pay are organization size; organization performance; executive-specific factors; organization structure; job or position-specific factors and job complexity (Bussin, 2011). Ellig (2007) argues that the structure of an executive's remuneration package will follow the path where it is the easiest for the executive to earn.” (Bussin, 2015). Considering that the above statement and evaluation of income was calculated in 2017, we can only imagine what that value is today. We can argue that a ten percent increase on the average yearly wage compared to the CEO’s salary based on the same percentage is still not enough to justify the compensation the CEO receives. “Its result showed that CEOs in South Africa earn around $7.14m (R97.5m) per year, compared to the $13 194 (R180 243) the average South African earns in the same period.” (Fin24, 2017). If one were to divide the these amounts by one another, the CEO would be earning 541 (rounded off) times more than that of the average employee. So, let us say that the CEO’s salary was halved, that would mean that we can create 270 average jobs for people per company. If we were able to get the CEO to take just a quarter of this compensation, we could possibly create 406 jobs within the specified organization. The CEO would still earn just over twenty-four million rand per annum based on these calculations. We need to understand that we might not be able to create all these jobs as we would need to consider how sustainable the organization will be in the next five to ten years.

The fact that some board of directors and shareholders might be comfortable with this amount of compensation is quite disturbing. Yes, CEO’s have high expectations based on their performance. They need to ensure that the decisions they make or changes they implement are for the good of the organization and the customer’s needs. However, what if your company is performing poorly and the CEO still expects or receives the same increase and bonuses as the previous years. When is enough, enough? Who speaks up for the masses or the organization in a case such as this? “Dudley is due to receive a total package of $11.6m for his work last year, according to the annual report. That compared with $19.6m in 2015, when the company had posted its largest annual loss for 20 years and axed thousands of jobs worldwide. Details of the 2015 pay deal had sparked outrage among the energy giant's shareholders, almost 60% of whom voted in April 2016 to reject the package in a non-binding vote. Initially for 2016, Dudley's pay had been proposed at $13.8m, but the company's pay committee lowered it by $2.2m.” (Fin24, 2017).

In the above scenario, one can see the shareholders were the individuals who spoke for the masses. This was not just based on the salary increase but they took everything into consideration. They looked at the two major factor which was that the company (BP) had reported its biggest financial loss over 2 decades and the amount of employment which has been lost. This speaks back to the statement made earlier, regarding the amount of jobs which can be created if the CEO takes a lower compensation package. “Little evidence supports the claim that CEO performance justifies very high compensation. Further, the complex interactive alliance between boards of directors and CEOs compromises rational decision-making about CEO compensation, with the Enron affair offered as an illustration of what can go wrong when dishonest CEO actions combine with lax board oversight.” (Perel, 2003). With that said, one also needs to consider that when a company, large or small, requires a certain job to be executed, they require a specific set of skills. If these skills are in short supply one needs to hire the right person for the job. This comes at the price where the CEO will or could possibly earn these large compensation packages.

At the same time, we need to be mindful of the fact as to the relationship the CEO has with the board of directors. If the CEO has their way, they could possibly sway or persuade the directors in such a manner to give them unreasonable increases in salaries and bonuses. “The board of directors has been identified as a key internal control mechanism for setting CEO compensation. Theory suggests that CEOs will attempt to circumvent board control in an effort to maximize salary.” (Boyd, 1994). With this said, we now see the immoral and unethical leadership which can be bestowed on an organization. Yet, these are the same CEO’s and directors who communicate and emphasize the values of the company, yet they do not portray these values or ethical behaviors themselves.

“Whilst it is clear that well-designed incentives or variable packages should be linked to the financial performance of the company, the issue of guaranteed CTC pay solutions for CEOs is more complex and open to distortion.” (Bussin & Nel, 2015). We should not let these figures mislead us, as the compensation package is not only made up of their Total Guaranteed Package (TGP). We need to understand that CEO’s have specific targets and deadlines which they to meet if they want to earn their bonuses and salaries. This is coordinated over short and long-term incentives. Short term being within a year and long term could be anything more than three years. “Short term incentives are typically made up of cash pay outs for reaching short term goals (usually less than one year) whereas long term incentives are commonly paid out in the form of equity in the business for long term performance (usually 3 years or more).” (Staff Writer, 2018). Therefore, we need to understand that if these bonuses and incentives are to be removed from the figures we are providing; this would then cause the compensation packages to decrease substantially.

As per (Staff Writer, 2018) “Nedbank CEO Mike Brown – R152,480 a day Brown earned a basic salary of R8.1 million and scored bonuses worth R13.75 million. The rest of his pay package was made up of vested shares as part of his long-term (LTI) incentives and dividends paid, bringing the total to R38.124 million. The CEO was also awarded a R14.5 million worth of shares for the year, as part of his LTI.” Is it justifiable to earn these large compensation packages? Let us take a moment to think about this and do a calculation. If a CEO stays in this role for about twelve years, and the basic salary increases by ten percent on average yearly, they will earn a basic salary in the region of R25.4 million by the twelfth year. What about the bonuses and the (LTI) Long Term Incentives? Do not misunderstand the fact that CEO’s are employees just as the next person in the organization. The only difference is the responsibility which is bestowed on each individual and their role.

So, how do we answer the underlying question – Have They No Shame? This is where we would need to apply Moral and Immoral thinking. Are some CEO’s worth the money they are being paid? Even if the CEO just earned their basic salary for the year, they would still be highly remunerated. Do we ask ourselves if the board of directors or shareholders who approves these salaries, are they acting immorally or morally? If we look at the BP example earlier where the shareholders revolted against the proposed increases of its CEO’s salary, did they act morally? Knowing for a fact that the company posted a loss, and many jobs were cut even though the CEO remains highly remunerated. In situations such as the BP situation, the organization to basically cut jobs to make up the salary of the CEO. This in turn adds pressure to the workers on the ground in the various departments where job cuts were made. This could possibly if not definitely demotivates individuals and slow down productivity. “In the most glaring cases—about a fifth of the companies studied—not only was the CEO overpaid, but the employees were underpaid, as well. When both occur—the CEO is overpaid, and the employee is underpaid—that’s when you really see the firm performance suffer.” (Gerdeman, 2018).

Understanding that the CEO has pressure to ensure that the company moves in the correct direction with regards to the requirements of directors and shareholders, are they ethically correct in justifying that they are more important than the average worker in the organization? If the average worker in the organization did not perform well and not make their targets, they would be placed on performance management system or probably be dismissed. However, these practices seem to not apply to the CEO. What makes them so different. Are all employees not contributing and working to the same goal or vision? Are we not all in this together for the betterment of the organization? Have they no shame, knowing that they can do so much more than just lead an organization?