Executive Pay: The Dirty Secret is Finally Exposed

A Personal View – May 2014

Warren Buffet must handily be the most well respected investor in the world. His astute investments over a lifetime have proved to be unrivalled in comparison with other investors. The homilies that he relates at the Berkshire Hathaway AGMs in Omaha, Nebraska are legendary. Berkshire Hathaway averaged an annual growth in book value of 19.7% to its shareholders for the last 48 years (compared to 9.4% from S&P 500 with dividends included for the same period), while employing large amounts of capital, and minimal debt.

Not only that, but his lifestyle is frugal in the extreme with no ostentatious displays of wealth. This has transformed Warren Buffet into the darling of the investment community. Berkshire Hathaway’s AGM is more akin to a private gathering where Warren together with his partner Charlie Munger answer questions totally unrelated to the business and that can be considered more of a personal and non-business nature.

With only a holding of 9.2%in Coca-Cola, Berkshire Hathaway is easily the largest investor. But then the unexpected happened that would amend my view on Buffet. Muhtar Kent, CEO of Coke proposed a new executive share option scheme that would transfer $13 billion to senior managers over a four year period.

Despite reservations that the scheme was too excessive & would dilute shareholders holding significantly, Warren Buffet elected to abstain from voting. According to the blog: http://www.timescolonist.com/opinion/blogs/buffett-disapproves-of-coca-cola-s-pay-plan-but-abstains-from-voting-against-it-1.981598 they quote Buffet as commenting as follows”

 “Taking them on is a little bit like belching at the dinner table. You can’t do it too often,” Buffett said.

 He added that he had voted in favour of compensation plans he hasn’t agreed with in the past.

 This is especially ironic as Buffett has long been a critic of excessive executive compensation. In fact Berkshire Hathaway does not award stock options to Buffett or any other executive, and Buffett himself receives a salary of $100,000.

In his letter to shareholders in 2005 he wrote: “Too often, executive compensation in the U.S. is ridiculously out of line with performance.” That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay.”

In spite of certain shareholders objecting, Coke’s executive pay scheme was passed by 82% of the shareholders.

Leading the pack in the attack on this grossly excessive pay scheme was Wintergreen Advisers which took public issue with it last month.

At the Shareholders meeting in Atlanta, Coca-Cola had the chair of its Compensation Committee address the issues raised about the pay plan. The company, he stated, “Has said its pay plan is in line with its past practices and that it’s needed to retain its talented workers.

After the meeting, Buffett was asked why he didn’t vote against the plan if he disapproved of it. Buffett responded that it was “kind of un-American to vote no at a Coke meeting.

Well if Warren Buffet, the most respected investor on the entire globe does not have the mettle to vote against a proposal relating to executive pay that he finds extravagant, who will vote against it.

Would the Remuneration Committee [RC] have the audacity to oppose any of management’s proposals in this regard?

Clearly not!

If that is the case why have a subterfuge in the form of the veil of objectivity provided by the Remuneration Committee. Rather dispense with such a lackey and let management unilaterally decide on their own remuneration.

Then I happened to read an article on a similar vein in today’s Star newspaper dated 1st May 2014 with the astonishing headline: “Top Chief Executives take Home average of R49m.”

I checked the detail just to make sure that they were not generalising based upon a sample size of one or maybe 2. No, that was not so. It clearly stated that the Chief Executives of the South Africa’s top 50 Companies in 2012 took home on average R49million including share options, bonuses, incentives and salaries.”

Again what about the RCs?

This is what Buffet has stated: “I have never heard anyone speak out against a compensation committee’s plan in 55 years of serving on company boards.

Let us look at what some of these packages were for 2012:

  • Impala Platinum – R 13 138 000
  • Anglo Platinum – R 17 629 795
  • Gold Fields – R 19 943 000
  • Shoprite – R 40 964 000
  • Woolworths – R 11 149 000

Even the percentage increases since 2005 were equally obscene:

  • Impala Platinum – 102.5%
  • Anglo Platinum – 230.5%
  • Gold Fields – 222.7%
  • Shoprite – 423.5
  • Woolworths – 132.56

No wonder the mineworkers at the platinum mines are not complacent about their meagre wage of R 4500 per month!

According to Kaylan Massie, this issue is addressed in her book co-written with Ann Crotty entitled  Executive Salaries: Who Should Have A Say On Pay? https://www.google.co.za/#q=executive+salaries+in+south+africa%3A+Who+should+have++a+say+on+pay%3F

These are a summary of the issues that they raise:

  • How do you strengthen the shareholder’s say on pay to ensure that the board of directors responsible for setting pay take into account multiple stakeholder interests?
  • Should the courts, the Department of Labour, employees, the tax man or the remaining 99% of society have a say on what the 1% are being paid?
  • How do you modify corporate governance standards, the tax code and labour legislation to achieve these goals?
  • How do we turn shareholders into activists and empower the workforce?
  • Is change only possible if a more fundamental shift in attitudes is achieved?

This book addresses these pressing issues and considers possible mechanisms to rein in excessive executive pay.

The dirty secret has been exposed. It is a myth that a Remuneration Committee rationally and objectively considers what the levels of remuneration, especially those of the CEO, should be.

These Committees are probably more of a gentleman’s Club which as Warren Buffett himself admits it is board room etiquette to disagree with management’s proposals on pay scales et al.

If that is the case, then the reluctance of existing members of the RC to perform their job in an unbiased fashion will necessitate an alternative solution.

Not being an oracle, I cannot offer any sage advice other than the fact that drastic revisions of the Company’s Act are required to stiffen the resolve of whatever mechanism is instituted to address this issue.







  1. I think that it is necesary to unpack the raw numbers as regards executive pay. Whilst the amounts appear obscene, sometimes the figures include amounts (especially share options) which are contingent upon performance targets being met into the future. A good CEO is “worth his weight in gold” if he is able to rally the company in the correct way to provide an increase in real shareholder value. See this extract from the chairman in FirstRand’s Annual report – “This year I am not planning to cover executive remuneration again, we continue to work on increased disclosure in the report of the remuneration committee (see page 81) and our philosophy remains intact – management reward must be directly aligned to shareholder returns.” If you read pages 81 onwards of the annual report (downloadable from the website), my perception (which I believe is correct) is that a considerable amount of thought and effort goes in to making sure that the remuneration package is appropriate and drives the correct behaviour, not only for those executives whose remuneration has to be disclosed but for the whole company. I did notice a significant drop in remuneration in past reports insofar as years reported on showing suboptimal performance (there is a four year comparison in the report, which in past reports looked back at years where performance in some areas had dropped). I am happy with the company I work for and have a small direct investment in. I suppose the question must be asked, “Is it this way across the board?” For this to be answered, each annual report would require disclosure and transparency with actions to match.

    • Hi Nigel

      You are correct of course but these numbers come from the book Executive Pay in South Africa by Ann Crotty & Kaylan Mursie

      They do state that these figures are inclusive

      However to counter your argument is that the gross remuneration very seldom goes down

      Therefore even though these figures are contingent upon performance, overall this does not seem to affect the total remuneration

      There is very little movement

  2. Your quoted CEO packages do not compare well to the average quoted in the newspaper article. Their average was R49m while only one of your examples exceeded R20m.

    Please explain.

    • Hi Blaine

      I am quoting directly from the Book by Ann Crotty which was released week. I had the same thought and the only explanation can be is the Koos Bekker’s remuneration in the form of share options was not quoted in the article but it amounted to R1 billon

  3. Share Price CEO pay
    Jan06 Dec12 Change change
    Implat 11662 16770 +43.8% (102.5%)
    Amplat 48300 44633 -7.6% (230.5%)
    Gfields 760 350 -54% (222.7%)
    Shoprit 1870 20450 +993% (423.5%)
    Woolies 1425 7126 +400% (132.6%)

    This little table hows the complete lack of correlation between company performance as reflected by the share price and CEO rewards.

    Although the sample is small I posit that it is broadly representative of the TOP 40 listed companies in SA and as such shows that the remuneration committees are nothing more than rubberstamping shams.

    An excellent example of companies getting it wrong was the case of VW in the’70s and ’80s. The head of VW saw that the company was heading into trouble with their single product, the iconic but hopelessly outdated Beetle. He initiated the program to change their No. 1 product from a rear engined, rear wheel drive car to the front enhgined, front wheel drive Golf. Around the end of the ’70s, just as the Golf was being introduced, he was replaced amid mounting losses. Needless to say, the incoming head recieved all the rewards and praise for the success that followed even though it was driven primarily by that one fundamental, monumentous and brave decision of a forgotten man.

    • Hi Blaine

      I totally agree. There is a disconnect between when the effort is applied & the reward is given. That is partly why I am so scathing of Remuneration Committees and the whole Executive Remuneration issue generally


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