By: Craig Rocher
The recent signing into law of the Companies Amendment Act by President Cyril Ramaphosa, will significantly impact public companies and shareholders alike as it requires disclosure of the earnings gap between their highest- and lowest-paid workers.
These amendments seek to address the persistent issue of pay disparity in South Africa, known as one of the most unequal societies in the world. Reports on remuneration inequality between executive-level employees and their lower-level counterparts in different sectors of the economy, are nothing new.
The legislated changes are aimed at enhancing remuneration reporting by providing greater transparency and detailed information about the justification for compensating directors and prescribed officers. This detailed information will empower shareholders to advocate for fairer remuneration practices and reforms where necessary and make informed decisions at the Annual General Meeting (AGM).
By requiring the disclosure of executive remuneration and the pay gap between directors and employees, companies will be held to higher standards of transparency and accountability.
For companies, it is crucial to recognise that non-compliance with these new reporting requirements may lead to regulatory scrutiny and reputational damage.
Companies must prioritise accurate reporting and engage in constructive dialogue with shareholders about their remuneration policies. Therefore, both companies and shareholders are encouraged to seek professional advice, as it is crucial for staying informed about these changes and understanding their implications in this evolving landscape.
The new bill
The amendments apply to public and state-owned companies who will in future be required to disclose the following information:
· The remuneration of the highest-paid employee
· The remuneration of the lowest-paid employee
· Average remuneration across the company
· Median remuneration
· The gap between the top 5% highest-paid employees and the bottom 5% lowest-paid employees
By including these key ratios, the Bill aims to clarify the extent of remuneration inequality within organisations.
The Presidency said the Companies Amendment Act addresses public concerns regarding high levels of inequalities in society by introducing better disclosure of senior executive remuneration and the reasonableness of the remuneration.
Previous amendments to the Companies Act mandated that companies disclose the remuneration of their directors and public officers to empower shareholders to confront excessive executive compensation. Unfortunately, many companies and their remuneration committees have not adequately addressed these items.
Employment and Labour Minister Nomakhosazana Meth said the requirement of the Companies Amendment Act, as signed by the President, will go a long way in exposing existing inequalities in employment.
However, there are concerns that out-of-context disclosures, particularly in companies with very few employees, could raise more questions than they answer.
Board approval
The Bill introduces a new requirement for public and state-owned companies to prepare and present a directors’ remuneration report for board approval. This report must disclose the pay gap between directors and workers in the state-owned companies’ annual financial statements and reports.
Additionally, a remuneration policy report must be presented at the AGM for approval by ordinary resolution. Once approved, this policy will only need to be revisited every three years unless material changes occur. If the remuneration policy fails to gain approval, it must be resubmitted at the next AGM until it is approved. Changes to the policy can only be implemented after receiving shareholder approval.
Legislative intent and concerns
According to the King IV Report on Corporate Governance, “the remuneration of executive management should be fair and responsible in the context of overall employee remuneration”. By disclosing executive pay and pay gaps, companies and shareholders can better assess whether directors’ compensation is fair and justifiable.
This practice aligns with a global shift toward greater transparency in corporate pay structures, as similar disclosure practices have been adopted internationally. However, one unintended consequence of these regulations could be that companies outsource lower-level services, such as cleaning, to narrow the pay gap between executives and lower-level employees.
* Rocher is the CA(SA) at Tax Consulting SA.
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