Capping executive pay is the key to stop money-guzzling SOEs from ruining SA
- William Gumede
Excessive remuneration at failing state-owned entities provides no incentive to become accountable.
SA should cap the pay, bonuses and incentive schemes for executives and board members of state-owned enterprises (SOEs), who often receive huge remuneration packages and annual bonuses even when the entities are loss-making, fail to deliver services or are frequently bailed out with public funds.
Excessive remuneration at failing entities has not only given executives no incentive to become efficient, honest and accountable, but has added to the ballooning public debt burden. Many failing SOEs that had asked for bailouts from the central government simply used the funds to pay bonuses to executives. Though SOEs should in theory send their remuneration and incentives schemes to the departments overseeing them for sign-off, this rarely happens. Nor do SOEs often refer their remuneration policies to regulators or the National Treasury before implementation.
SA urgently needs a new, more sustainable SOE remuneration policy to guide executive and board remuneration. Such a policy must be based on performance rather than solely on a company’s balance sheet. Over the past few years many countries have introduced similar reforms, including capping executive and board pay at all entities, no matter whether they are profitable or loss-making, and cutting executive and board pay when companies make losses.
Many countries keep SOE executive and board remuneration far below that of the private sector. Some countries are now trying to keep the gap between executive pay and that of ordinary employees within certain bounds — usually a ratio of 1:12 at the most. After the 2007/2008 global financial crisis many countries introduced pay limits. The Chinese government dictated in 2008 that general SOE executive remuneration should not be more than 90% of the level it was the year before the crisis.
In 2014, China put an upper limit on all SOE executive pay, and the government introduced a minimum 10% pay cut for executive and boards when SOEs post losses. China’s Assets Supervision and Administration Commission and the ministry of human resources & social security also announced that executive pay at SOEs could not be larger than 10 times the salary of the lowest paid employee.
In 2011 Norway issued SOE guidelines that restrict them from remunerating executives and board members above private sector levels. Variable aspects of remuneration, such as bonuses, must not exceed six months of fixed pay, and severance packages cannot be more than one year’s salary, while management pensions should be at similar levels to those of ordinary employees.
Sweden does not allow variable remuneration for SOE executives, such as bonuses, incentive programmes or payments from profit-sharing. There the chair of an SOE must orally account for the remuneration of executives and boards at an annual general meeting, which is open to the public, media and civil society. SOE board members are paid a fixed percentage of executive pay.
In SA the remuneration of many SOE boards is so high that members’ independence is jeopardised, making them yes-men and women who dare not rock the boat for fear of losing their positions and income. Board remuneration cannot be so low that it is difficult to find competent individuals to do the job, or that they have no incentive to play their oversight role, but there has to be some link to individual and company performance. If the SOE is making a loss, board members should also feel the pinch, as should executives.
In 2016 executives of state oil company PetroSA received R17.3m in bonuses, despite the organisation reporting a R14bn loss that year. The former CEO of the Road Accident Fund was paid nearly R4m in the 2017/2018 financial year for working for just three months, including a R2m “performance bonus”. In the same year the fund’s bank account had been attached by the sheriff of the court over R8bn of unpaid debts.
Eskom executives have also received huge bonuses despite the utility’s financial failure and load-shedding. As a case in point, in the 2010 financial year its executive directors received a 25% increase in remuneration, supposedly to ensure adequate coal stockpiles were maintained and the electricity supply remained uninterrupted.
In the 2016/2017 financial year, when SAA reported a R5bn loss and received a government bailout, the company also splurged on executive remuneration. In the 2011/2012 financial year the CEOs of Transnet Port Terminals and Transnet National Ports Authority received annual increases of 42.46% and 18.86% respectively, yet long-delays, red tape and inefficiencies at SA ports were and are undermining economic growth.
To add insult to injury, many SOEs repeatedly fail to complete their annual financial statements. In the auditor-general’s 2018/2019 consolidated national and provincial audit, SAA, the SA Energy Corporation — for the second consecutive year — and the Trans-Caledon Tunnel Authority failed to submit their financials. In such cases the remuneration of executives and board members should be cut forthwith.
Often performance bonuses are paid at SOEs when entities have merely performed basic functions. Yet the idea of such bonuses is that they should be linked to genuine performance increases. To determine appropriate remuneration for executives and boards SOEs should preferably be grouped according to their industry, size and complexity. Remuneration should be structured taking these characteristics into account.
Though similar companies in the private sector can provide a benchmark for remuneration, profitability, whether the entity operates as a monopoly without any competitors, and quality of services and products should also be considered. In fact, when benchmarked against similar private companies a significant “public sector discount” should be applied.
Due to the Covid-19 financial crisis the government should cut executive and board remuneration of SOEs across the board, and those that are failing should be cut again. Remuneration and incentives for boards and executives of SOEs should be made public, and their often secretive annual general meetings should be open to all citizens, media and civil society organisations, which should object loudly to extravagant remuneration packages.
The Treasury, as the defender of the public purse, should block excessive remuneration, especially when SOEs perform poorly, refuse to provide their annual financial reports or deliver erratic services.
Parliament should also interrogate SOE remuneration more robustly. Many executives and board members at SOEs are not appointed on merit, skills or experience, but on political connections. Change to remuneration policies must also go with making appointments to SOE executives and boards genuinely meritocratic, to attract the best skills to manage these money-guzzling, inefficient and corrupt entities.
William Gumede is Associate Professor, School of Government, University of the Witwatersrand. This is an edited extract from his recent masterclass “Governance in State-Owned Companies”, first published in https://www.businesslive.co.za/