Income inequality: Executive salaries and Pay discrimination

Debbie Collier

&

Kathy Idensohn

Overview of presentation

• Income inequality: its context and impact• Labour law mechanisms

– Wage setting– Unfair discrimination (‘equal pay for equal work’)– Law on income differentials

• The regulation of executive remuneration– Company law regulation– Regulation through corporate governance codes– Additional, supplementary measures

• Concluding remarks

Income inequality: its context and impact

• Post-apartheid commitment to equality– Context of structural inequality – Commitment to substantive equality– Market realities: ‘resource curse’ / ‘skills mismatch’– Current wages often not a living wage

• South Africa’s increasing Gini coefficient– 0.679 (Bhorat 2009)

• Social & economic consequences of inequality– ‘Efficient inequality range’ : 0.35 – 0.4

UNDP Human Development Report 2009 (life expectancy, level of education, and decent

standard of living)

“Exploding executive pay must be reversed”

(Business Day 29 July 2010)

‘... Increases have just exploded in the recent past. During the 1960s and 1970s, US CEOs earned roughly 20 times what ordinary workers earned. It doubled by the start of the 1980s and doubled again by the end of that decade.

But this is trivial compared with the increase in the 2000s. At the start of the decade, the average American CEO was earning 525 times more than the average worker, and it’s only slightly less now’.

(Tim Cohen)

Executive director salary increases : 2007/08 *

* Labour Research Service : Bargaining Indicators 2009

Executive director Chief executive officer

Non-executive directors

Low-wage worker

R6 439, 000 R10 460, 000 R522, 000 R31, 704

207 x 337 x 16 x

‘… executive director salaries, across sectors, rose 11.6 percent on average, those of chief executive officers increased by on average 14 percent and non-executive directors saw their fees rise by 15 percent. The average low-wage worker saw an increase of 10.1 percent in 2008.’

[Inflation : 10.3% / Company profit 14.8%]

Wage increases between fourth quarter 2008 and fourth quarter 2009 *

Private Sector % Increase Public Sector % Increase

Construction sector 16.7 % SOEs 26.6 %

Mining 13.4 % Provincial 23.9 %

Electricity generating 12.2 % National govt 18.0 %

Non govt transport 11.4 %- OS adjustment

* Source : SA Reserve Bank

2010 Call for restraint

Labour Law mechanisms: (1) Pay discrimination

• Section 6 of the EEA • Individual right to ‘equal pay for equal work’• Lack of intention is not a defence• The aggrieved employee must show that his or her salary

is less than [white [or male] comparator] because of race [or gender] (listed / unlisted ground)

• Mutale v Lorcom Twenty Two CC

‘Equal pay for equal work’

• Hurdles:– Comparator

• Louw v Golden Arrow Bus Services

• Mangena & Others v Fila SA (Pty) Ltd

– Link between unequal pay and alleged ground –‘Causation’• Ntai & others v SA Breweries

– For indirect discrimination – a matter of statistics / analysis– For unlisted (arbitrary) discrimination – must show impact on

dignity – National Union of Metalworkers of SA & Others v Gabriels (Pty) Ltd

Labour Law mechanisms: (2) Income differentials

• Section 27 EEA ‘income differentials’• Obligation on designated employers to report on

differentials (& reduce if disproportionate)• Limitations:

– collective mechanism - generally not justiciable– NUMSA obo members and Behr Climate & Control– Need and redress not explicitly addressed in policy– Requires employment relationship

The regulation of executive remuneration

• Company Law regulation

• Regulation through corporate governance codes

• Additional, supplementary measures

Company law regulation

• The traditional common law approach • Shareholder primacy• Some safeguards against abuse• Good faith restrictions on majority shareholders• Directors' fiduciary duties• Shareholder remedies • The limits of the common law

The need for more restrictions and controls

• The Companies Act 71 of 2008

 • Baseline requirements (ss 66(8) & (9))

 • Disclosure requirements (s30)

Ongoing difficulties with company law regulation

• Limits of fiduciary duties

• Courts' reluctance to make business decisions

 • Enforcement difficulties

• Reliance on shareholders

• Limited recognition of other interest groups

The corporate governance movement

• Corporate governance codes –King III• The principles of good governance• Independence• Reasonableness• Performance-based• Transparent

The provisions of King III

•  Application to all public, private & non-profit entities

• The 'apply or explain' principle

• Enforcement

•Independence – The Remuneration Committee•A clear remuneration policy & criteria•'Fair and reasonable' remuneration•Performance-based•Transparent

Executive remuneration provisions

• Independence – The Remuneration Committee

• A clear remuneration policy & criteria

 • 'Fair and responsible' remuneration

 • Performance-based

 • Transparent

The efficacy of corporate governance codes

Concluding remarks• Wage compression policy and its challenges

– Centralised bargaining / global & business forces

• Better use of existing mechanisms– Promotion of transparency– Trade union derivative actions in company law

• Complexity should not lead to paralysis– Negotiated proportionality should be pursued– Social security, tax, and other mechanisms such as job

subsidies should all be actively debated as mechanisms to reduce to income gap