The economic downturn in South Africa caused by the COVID-19 pandemic and lockdown has resulted in higher unemployment, which, in turn, has caused increased inequality.
President Cyril Ramaphosa said the pandemic has thrown into sharp focus the poverty and inequality that still defines our society.
As one of the most unequal countries in the world, the gap between the rich and the poor has been a contentious issue for years in South Africa.
Discussions about inequality often include a comparison of executive salaries with those of ordinary workers.
It has become so topical that amendments to the Companies Act 2008 were proposed to force companies to disclose the pay gap between the lowest-paid employee and the CEO.
The Department of Labour has also amended the Employment Equity regulations to assess the pay gap between the highest- and lowest-paid employees of designated employers.
While there are no guidelines on what an acceptable ratio or range is, it is clear that the focus on this pay gap has increased in South Africa.
Many commentators have called for a cap on executive pay, but Professor Brian Kantor, an economist and former Chief Investment Strategist of Investec, disagrees.
Speaking to Business Day TV, Kantor said the responsibility of a company’s board is to find the right person to lead the company and pay them accordingly.
He said the right CEO is extremely important to grow the company and create employment, and the salary package should be high enough to attract top talent.
Great CEOs create successful companies, which in turn create well-paid and happy employees.
Kantor said any plan to regulate what is paid at the top of a company and at the bottom is a “shockingly bad idea”.
“It represents a misunderstanding of the nature of the business enterprise that delivers goods and services, employment, and income to savers,” he said.
He said businesses are the foundation of the economy and the system is working well. He added that the business environment works best when left alone.
Kantor cautioned that it does not mean the board, which represents essential stakeholders, does not have a responsibly to effectively manage executive pay.
He said getting the link between performance and reward for executives right is a crucial ingredient in business success.
However, getting it right has nothing to do with the relationship between a CEO’s salary and that of the lowest-paid workers.
The pay gap will also differ vastly based on the type of business, with a big gap expected in a mining firm and a much smaller gap in a law firm.
His message to regulators and the government is: “Stay out and leave it to the marketplace to work these things out”.
Salary gaps at South African tech companies
American management consultant Peter Drucker believed the ratio between a CEO’s pay and that of an average worker should be between 20:1 and 25:1.
These ratios are in line with the scenario in 1965 in the United States, but since then the situation has changed significantly.
The pay gap increased rapidly since 1965 and by 2000 CEO salaries were 376-times that of the average worker.
A recent analysis by PwC using the national minimum wage as the lower reference point showed a 66x multiple on fixed pay between CEOs and low-levels employees in South Africa.
When the national minimum wage is substituted for an “unskilled median wage”- the median wage of all unskilled labour within the PwC salary survey database – the multiple shifts to 24x.
This raises the question of what the pay gap is between CEOs and average workers at South Africa’s tech companies.
South African tech companies do not report the lowest-paid salaries in their companies. It is, however, possible to get the average salary of all employees.
State-owned enterprises report their average employee salaries, while JSE listed companies report employee remuneration and the number of employees.
Dividing employee remuneration – which includes salaries and bonuses – by the number of employees gives a fair representation of average employee pay packages.
This analysis shows that the average salary at South Africa’s top IT and telecoms companies is R611,000, well above the country’s average of R270,000.
Comparing CEO salaries with typical employee salaries for SA tech companies show that the average ratio is 28:1, close to what Drucker suggested.
Broadband Infraco has the lowest ratio at 4:1, while MTN had the highest ratio at 106:1.
The table below shows the ratio between the CEO’s salary and that of an average employee.
It should be noted that in cases where the CEO was only in office for a part of the year, a full year’s salary was calculated.
|CEO Pay versus Average Salaries|
|Company||Number of Employees||CEO Salary||Average Employee Salary||Ratio|