Nova workboard

a blog from young economists at Nova SBE

An argument for limiting executive remuneration in South Africa to address income inequality

The remuneration of company directors and Chief Executive Officers (CEOs) has been the subject of much interest and research and has become somewhat of a controversial topic in recent economic discourse. Since the Global Financial Crisis in 2008 and the identification of executive remuneration as a contributing factor, there has been increasing pressure to monitor and limit how CEOs are rewarded. In the South African economy, CEOs in the majority of companies earn considerably higher wages than the average worker. Given the high levels of inequality in South Africa, particularly earnings inequality, the discussion regarding limiting excessive levels of executive salary is especially relevant.

In terms of income distribution, South Africa is one of the most unequal societies in the world with a GINI coefficient of 0.63 according to the World Bank. An analysis of the distribution of income shows that the wealthiest 10% of South Africans have a share of market income of 64%, whereas the poorest 50% have a share of just 3%.

Traditional economic theory posits that inequality is not only inevitable but desirable for economic growth due to the ‘saving-enhancing effect’, which means that the rich save more than the poor due to higher levels of disposable income. However, recent theoretical developments challenge this relationship and link higher levels of inequality to reduced growth through various conditions such as political and social instability leading to greater uncertainty and lower investment; insecurity of property rights; and increased transaction costs. A recent study by the IMF cites similar economic consequences of inequality, including a lack of mobility and opportunity for large parts of the population and a suboptimal use of human resources, which can negatively impact growth and macroeconomic stability.

The causes of inequality in South Africa are complex and, to a large extent, historical and structural in nature. One important factor receiving an increasing amount of scrutiny is the contribution of disparities in wages, specifically exorbitant remuneration for executives and CEOs, to overall income inequality within the economy. A comprehensive study of executive remuneration found that 78% of CEOs earned more in a month than the average worker earned in a year, which translates into an annual earnings ratio of thirty-six to one. This significant difference in remuneration between company executives and average workers is even more pronounced when looking at the remuneration for the top-earning CEOs. An article published in the Mail & Guardian revealed that in 2012 the total remuneration package, including salary and dividend pay-out, of the highest paid CEO in South Africa was R1.8 billion, roughly 486 000 times the income of a person receiving a child support grant.

One way in which labour market dynamics can be altered to address the issue of the wage gap, and thus inequality, is through an imposed limitation on the total remuneration package paid to CEOs. The notion of a cap on total salary for executives is certainly not new and has gained popular support internationally, particularly since the Global Financial Crisis of 2008. An example of a policy to cap executive pay is the Minder Initiative, a national referendum approved by voters in Switzerland which called for bans on certain forms of compensation. It is important in the South African context to ensure that any such measures address the issue of income distribution and inequality. One recommendation is limiting bonus payments in the form of share options and dividends to a certain percentage of base salary, as has been proposed in the European Parliament. A comparable amount of shares and/or dividends (which would have been paid to the CEO) can then be distributed amongst the lowest paid employees in the company. Due to the fact that a large portion of CEO remuneration packages are often comprised of shares and dividend payments, this represents a significant amount of income that can be transferred to low-wage employees.

Given the high levels of inequality in the South African economy and the negative consequences for economic growth, redistribution of income is vital. The huge disparity in wage levels between CEOs and average workers is exacerbating income inequality and thus the capping of executive remuneration presents a realistic opportunity for addressing the issues of inequality and redistribution of wealth.

Scott Unwin

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Author: studentnovasbe

Master student in Nova Sbe

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