TRACEY DAVIES: PwC waves magic wage gap wand
In its latest report on executive remuneration, the firm has magicked away about two-thirds of CEO pay
In one fell swoop, PwC appears to have eliminated SA’s socially destabilising wage gap. The auditing firm’s recently released "Practices and Remuneration Trends Report — Executive Directors" analyses publicly available information on executive remuneration at JSE-listed companies for the period May 1 2019 to February 29 2020.
PwC concludes that the median pay of a JSE CEO is only 18 times that of a semiskilled employee, and 24 times that of an unskilled employee. The gap between CEO pay and the national minimum wage — acknowledged by PwC to be insufficient to support a decent standard of living — is presented as a rather reasonable 66 times.
How does PwC achieve this feat of making the wage gap look relatively acceptable, in a country the World Bank considers to have the highest income inequality in the world? It uses only total guaranteed pay (TGP) as its base for comparison, and ignores by far the most significant components of executive pay: short-and long-term incentives.
According to PwC, the median TGP for the CEO of a JSE-listed company is R5.2m, or R2.8m after tax. According to PwC salary surveys, the semiskilled median wage is R200,388 a year (R164,318 after tax), and the unskilled median wage is R146,832 (R120,402 after tax). The national minimum wage of R43,596 is not taxed, as it falls below the R83,100 tax threshold.
This gives PwC its ratios of CEO pay as 18, 24 and 66 times that of these three pay categories.
However, it is hugely problematic to represent TGP as a realistic figure for comparison. The rule of thumb is that TGP represents about a third of the total value of a CEO’s remuneration package, with short-and long-term incentives each making up an additional third. Even this sometimes overstates the value of TGP. So, on average, PwC has made about two-thirds of CEO pay disappear.
PwC ignores by far the most significant components of executive pay: short- and long-term incentives
Pay gap surveys in other parts of the world do not use TGP as the basis for comparison. PwC itself strangely compares SA’s pay gap with the "CEO-to-average-worker pay ratios" in the US (287:1) and the UK (117:1), which are based on total pay, not guaranteed pay.
To illustrate the problem, consider SA’s most extreme example: Naspers. Using PwC’s approach, CEO Bob van Dijk’s remuneration for the year to March 2020 — his TGP — was R23.46m. The additional R252m that Van Dijk received in short-and long-term share-based incentives and "other benefits" simply doesn’t count.
In addition to the problematic restriction of CEO pay to TGP, PwC’s analysis also takes place in the absence of half the information required to reach an evidence-based conclusion. JSE-listed companies do not publicly disclose data about the wage gap between their lowest-and highest-paid workers — the most relevant information for assessing wage inequality.
At Naspers’s AGM on August 20, Just Share asked how shareholders can make informed decisions about the fairness of executive pay in the absence of information in the company’s (44-page) remuneration report about the pay of any SA-based staff.
Company chair Koos Bekker’s brief initial response was that food delivery drivers in Denmark and India earn "completely unrelated packages" and that it is a "very vibrant world".
Somewhat more helpfully, "chief people officer" Aileen O’Toole said Naspers "absolutely agrees that societal fairness is a really important element in our pay practices and something that we take very seriously", and committed to reviewing disclosures on wage gaps next year.
Flaws and fairness
PwC’s report frequently references the proposed amendments to the Companies Act, which would make public disclosure of the wage gap mandatory. Is it in anticipation of this that PwC is trying so hard to magic away concerns about executive pay?
One can’t help feeling, when reading the PwC report, that its drafters have made a genuine attempt to understand wage inequality. But their own professional context renders them unable to come to any conclusion other than that executive pay levels in SA are just fine.
After all, PwC itself has a "rewards and benefits" advisory division, which advises many of these companies on how to structure their executive pay packages. Are they really the best people to be telling the rest of us what a fair wage gap is?
- Davies is director of shareholder activist organisation Just Share
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