More to an executive's pay package than meets the eye

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Shareholder activists, journalists and other interested parties go over annual reports with a fine-tooth comb looking for the highest-paid executives. But it is hard to compare their pay packages just by adding up the "total remuneration" column in an annual report.

If the remuneration tables between the big four banks, for example, were simply compared, you would be forgiven for thinking Nedbank's Mike Brown is the highest-paid CEO. The issue is more complex than that, as each of the four banks award shares that vest over a lengthy period, some within a year, others in three years.

Whether the shares are paid out eventually, depends on the performance of the company and the individual CEO.

For instance, in 2012, Barclays Africa CEO Maria Ramos was awarded long-term incentives that could have potentially paid out R32m after three years. But of this R32m, she will receive only R6.2m, with half having been paid out in the 2015 financial year, and the remainder this year.

Like Ramos, many of Brown's shares awarded in 2012 lapsed, according to Nedbank's remuneration report. Of 64,862 shares awarded to him at a value of R5.3m, he received 44,723 last year, although share price gains meant their value surged to R11.3m by last year.

Cash-performance incentives awarded to him in 2012, but delivered in shares last year, reached R7.3m.

The art of deciphering remuneration reports

"It is indeed vexing to decipher and somewhat of an art," says remuneration expert Mark Bussin, chairman of 21st Century Pay Solutions, of the banks' remuneration reports. "King IV is coming out strongly in favour of more transparent and simpler reporting."

A draft of the King IV code on corporate governance released in March proposes a remuneration "disclosure benchmark" that enables comparative analyses among firms within the same peer group.

The problem appears to be that share options awarded during the year (which vest in later periods) as part of long-term incentive schemes are included in remuneration tables that are silent on the actual number of share options awarded. Some do not specify vesting periods.

"Reporting on guaranteed remuneration and bonus awards including deferrals, is relatively consistent," says Clinton Rodgers, Nedbank's executive head for reward.

"It is the reporting on long-term incentive awards that makes the comparisons more challenging," Rodgers says.

Difference in disclosure tables

Nedbank includes all remuneration elements in a single disclosure table, using the rand value of the different awards, while some of its peers reported long-term incentives separately, he says.

"This then results in readers potentially making comparisons that are not like for like, and, therefore, drawing incorrect conclusions on the relativity of remuneration levels," Rodgers says.

To get past these disparities in reporting, remuneration experts have suggested using an actual "realised compensation" model for comparisons. This includes the guaranteed package paid and cash component of the bonus paid to executives during the financial year, with the value of any share awards that vested during the year.

For example, a simple comparison of the remuneration reports published by Standard Bank and Barclays Africa would show that joint CEOs Sim Tshabalala and Ben Kruger earned just R2m more than Ramos, whose total remuneration was reported at R28.2m last year.

But this is not an accurate picture. In fact, Standard Bank awarded Tshabalala and Kruger R11.8m each in deferred awards - which investor relations head David Kinsey says will be released in three equal tranches only over 18, 30 and 42 months from March 2015 - while Ramos was granted shares worth R8.2m, to be released in three years.

"The final value of the award is dependent on the share price at the time of vesting," Kinsey observes.

"Benefits derived"

Standard Bank says it reports the release of these shares under "benefits derived" further down in its remuneration report, showing Tshabalala enjoyed R8.1m in vested shares, while Kruger obtained the right to exercise shares worth nearly R6m.

Kinsey says these awards are not conditional on group performance, so only movements in the share price would affect how much the joint CEOs received at the date of vesting.

FirstRand's 2015 remuneration report shows the banking group's former CEO Sizwe Nxasana made R33.4m in total remuneration last year. But this amount included share awards vesting in two years.

Stripping out these awards, and including shares that vested in line with the realised compensation model, Nxasana was the best-rewarded banking CEO last year, pocketing R35.1m from shares granted as part of FirstRand's long-term incentive programmes.

This excludes R75m gained from participating in FirstRand's black non-executive directors scheme and the FirstRand black employee scheme.

FirstRand spokeswoman Sam Moss argues that the long-term incentives should be stripped out of the realised compensation model, as they were awarded in 2011.

"Market value appreciation would be accrued over the period," she says. "Proper comparisons are very difficult, and personally, I believe that the different performance criteria used by the banks are a valid reason not to include (long-term incentives) in the year they vest because the vesting values should be properly contextualised against... performance targets."

Moss says shareholder value-creation is also different, and long-term incentives are at risk over the vesting period - meaning that they could be lost due to failure to meet performance goals. They could also lose their value.

Source: Business Day via I-Net Bridge