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Executive pay and Inequality

Updated: Jul 10, 2020

Great article by Bob Rose in the Business Day yesterday on Executive Pay. Good to see steps being taken to reduce the discrepancy between huge executive pay packages and wages being paid to workers.

"This week, a draft rule was proposed in Britain’s parliament with great significance for some of the largest companies on the JSE — including Anglo American, British American Tobacco and Investec — that have a dual listing on London’s stock exchange. This rule will force all London-listed companies to publish the ratio of their CEO’s pay to that of the average worker, as well as the justification for it. It is the culmination of UK prime minister Theresa May’s call in 2016 to curb runaway executive pay.

The Brits aren’t alone. The US has already had this rule in force for a year, and Australia has an even harsher "two strikes" rule that makes it possible for all directors to be voted off the board after two successive years in which more than 25% of shareholders vote against a company’s pay policy.

But the jury is still out on whether these rules will work. In the US, publication of this ratio has failed to produce the public shaming of CEOs that many thought would lead to lower pay levels.

At the least though, disclosure has helped us understand the pay dynamic better. Ethan Rouen, a professor at Harvard Business School, studied thousands of US annual reports and came to the intriguing conclusion that firms with an abnormally high ratio of CEO pay to that of their average staff member performed worse than their rivals. "When both occur — the CEO is overpaid and the employee is underpaid — you really see the firm’s performance suffer," Rouen says."

Reminds me of an ethical audit my brother was doing on a supplier of Tesco in South Africa, to ensure that their employees are being treated fairly. I think the wage of lowest paid employee at the SA supplier was approx. R3000. In the same year the CEO of Tesco had earned circa GBP4,7m. This was 34,000 times the SA supplier's employee wage, but they had ticked the box by doing the ethical audit. There were eight pages of the annual report dedicated to the CEO and CFO remuneration. I wonder how much was spent on this versus time spent on the thousands of employees remuneration?, i.e. time spent and cost of exec review versus time and cost of employee review.

The tesco share price has gone sideways for the past three years.

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