Abstract
Executive compensation has become a topical subject for the media, trade unions, the
government and the general public. Precipitous and exorbitant annual increases,
inadequate disclosure, short-termism and rent extraction are amongst the reasons for the
controversy in executive compensation. Based on the shareholder supremacy model,
executives tend to focus narrowly on increasing profits, dividends and share prices in order
to extract rent from the companies through executive compensation.
Extracting rent from the companies through executive compensation is enabled by the fact
that the executive compensation is determined with reference to the financial performance
measures which are not only susceptible to manipulation but are also short-term in nature.
The aim of this study is to develop a non-financial performance metric that can be used in
determining executive compensation. Such a metric can in turn be used in conjunction with
the existing, traditional monetary execution measures to guarantee that executives are not
obsessed with transient additions to the detriment of long-haul maintainability of companies.
Secondary data consisting of the sampled companies’ annual reports available on the
IRESS database were analysed to evaluate the relationship between company
performance, financial and non-financial, and executive compensation of JSE listed
companies. Content analysis of the archival data and literature including the South African
companies’ Act, King reports and equivalent legislation from the United States of America
(USA) and the United Kingdom (UK) was performed to conduct a gap analysis for the
identification of any areas of improvement in disclosure and regulatory requirements
pertaining to executive compensation. Detailed in-depth rounds of surveys were sent out to
a carefully selected panel of experts in the field of executive compensation to obtain input
on the non-financial performance metric.
The analysis of data revealed three significant findings. First, the executive compensation
on JSE listed companies is highly skewed and reliant on financial performance measures
and it has no regard for the non-financial performance measures. Secondly, South Africa’s
regulatory and disclosure framework relating to executive compensation needs
improvement for it to be aligned with the international best practices and still be cognisant
of the country’s context. Finally, a composite mix of non-financial performance indicators
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grounded on environmental, social and governance (ESG) philosophy was developed
following literature and input from a panel of experts.
Keywords: Executive compensation; executive remuneration; performance measures;
inequality; short-termism; rent extraction; agency theory; corporate governance; disclosure
and regulatory requirements.