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REMUNERATION OF EXECUTIVE AND NON-EXECUTIVE DIRECTORS: STATUS UPDATE TO PORTFOLIO COMMITTEE 24 APRIL 2012. CONTENTS. Background & Problem Statement The Review Key Issues Considered Status Quo Conclusion. CONFIDENTIAL. 2. BACKGROUND & PROBLEM STATEMENT (1). - PowerPoint PPT Presentation
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REMUNERATION OF REMUNERATION OF EXECUTIVE AND NON-EXECUTIVE AND NON-
EXECUTIVE DIRECTORS: EXECUTIVE DIRECTORS: STATUS UPDATE TO STATUS UPDATE TO
PORTFOLIO COMMITTEEPORTFOLIO COMMITTEE
24 APRIL 201224 APRIL 2012
CONTENTSCONTENTS
• Background & Problem Statement• The Review• Key Issues Considered• Status Quo• Conclusion
2CONFIDENTIAL
BACKGROUND & PROBLEM STATEMENT (1)BACKGROUND & PROBLEM STATEMENT (1)• Remuneration of directors (executives & non) is a complex and widely
debated topic - both in public & private sector - Recent media reports on ABSA, Citigroup, Barclays.
• Challenge in striking a fine balance between several variables.
• Full and adequate disclosure of the fees – out of pocket allowance, stipends, ‘away–from-home’ allowances;
• Short term vs long term incentives & criteria used to award such incentives.
• Fee structure:o simplistic approach where lump sum is paid;o fixed Board fees; oro retainers subject to meeting attendance.
• 2007 - Cabinet approve the DPE Remuneration Guideline - based on asset and revenue of the SOC.
CONFIDENTIAL 33
BACKGROUND & PROBLEM STATEMENT (2)BACKGROUND & PROBLEM STATEMENT (2)Challenges:
• Evolution of the DPE shareholder function.
• Market forces & shortage of skills especially in light of the massive SOC infrastructure plans.
• The guideline is not applied in a uniform and consistent manner;
• In certain instances an alternate model is being used.
• The monitoring and evaluation of the guideline has been informal and ad hoc;
• The guidelines did not explicitly provide the link between national strategic objectives and the remuneration of the executives and non-executives.
CONFIDENTIAL 44
BACKGROUND & PROBLEM STATEMENT (3)BACKGROUND & PROBLEM STATEMENT (3)
December 2010: Panel was established with the ff mandate:
•Undertake a comprehensive review to test the remuneration practices laid down in the 2007 guidelines;
• Alignment (SOC activities & remuneration) with shareholder developmental objective;
• Consideration for market trends.
Four work streams were established:
• Remuneration and benefits;
• Corporate Governance;
• Employment Contracts;
• Stakeholder engagement.
CONFIDENTIAL 55
BACKGROUND & PROBLEM STATEMENT (4)BACKGROUND & PROBLEM STATEMENT (4)
Consultations with key stakeholders was necessary:
•SOC , as directly affected parties.
• Other Government departments (EDD, DTI, NT & DPSA);
•Presidential Review Committee;
• All supported the rationale for the review.
Outcome:
• Further submissions on the SOC remuneration model.
• Alignment of various stakeholder interests.
• Consensus on the application of the future model.
• SOC within DPE oversight only; or
• All major public entities (PFMA Schedule 2)
CONFIDENTIAL 66
KEY ISSUES CONSIDERED (1)KEY ISSUES CONSIDERED (1)In initiating the review, a number of material questions were asked.
•What are the minimum activities that require benchmark & the benchmark tool? – King III, JSE listing requirement, international companies e.t.c.
•Should we consider uniform implementation of performance agreements for all CEOs & senior executives?
•How do we achieve consistent approach to conditions of service across all SOC?
•What is the link between remuneration & SOC effectiveness?•Short vs long term incentives - how do we strike the balance?•Good corporate governance & the effectiveness of the Board
Remuneration Committees – what is the test?•What is the alignment of Board fees to the market?
CONFIDENTIAL 77
KEY ISSUES CONSIDERED (2)KEY ISSUES CONSIDERED (2)In the main, the Panel highlighted the ff observations:
•In some instances the DPE guidelines are followed in others not;
•Other SOC use external benchmarks & totally disregard the DPE guidelines;
•In some instances approval of the DPE sought in others not;
•In some instances SOC adopt DPE guidelines in others a different policy altogether;
•The need for trade offs between remuneration vs SOC ability to attract skilled and competent directors & executives;
•Succession planning & determining the appropriate levels of remuneration for executives – comparative benchmarks;
•The need to align the short and long-term incentive practices terms of quantum, with the SOC level of achievement;
• Recognition for SOC public mandate which differ from private companies .
These issues constitutes the scope of the Panel’s recommendations.
CONFIDENTIAL 8
KEY ISSUES CONSIDERED (3)KEY ISSUES CONSIDERED (3)•Panel submitted its recommendations to Minister of Public
Enterprises.
•Cabinet has noted the panel’s report and requested the Minister to engage in further consultations .
Further/Additional Questions:
•How do we balance remuneration against scarce skills & service delivery objectives?
•How do we inculcate the culture of public service obligation as opposed to the high risk environment of the profit driven private sector?
•Status of the guidelines: How does Government address remuneration challenges within the current legal landscape – remuneration is a subject of negotiations?
•Officials and executives employed within Government & serving on SOC Boards – should they receive additional remuneration?
CONFIDENTIAL 99
STATUS QUOSTATUS QUODPE is addressing Cabinet’s request.
• Review of DPE guidelines to retained aspects that are necessary for Shareholder oversight and have proven to be good practice;
• Remodel short term incentives to be linked to performance against compact targets;
• Examine the practice and methodology to abolish long term incentives for executive directors;
• Establish imperatives other than asset and revenue such as developmental mandate, complexity of the SOC business environment, funding structure e.t.c;
• Undertake benchmarking exercise into other regimes;
• Address best practice in Board fees with a view to enhancing the effectiveness of the Board & committees.
• The appointment of a suitable service provider to develop the Guidelines.
•endorsed that Minister will determine the way forward after consultation with key stakeholders
CONFIDENTIAL 1100
CONCLUSIONCONCLUSION
• DPE is the only shareholder department that has developed the remuneration guidelines for SOC – inevitable challenges in light of changing market conditions.
• Competition between the public & private sector for competent skills - attraction & retention is critical.
• New Paradigm Shift:
• As the DPE & SOC mandates evolve, innovation will be necessary to find better remuneration models;
• Remuneration framework should be able to provide the public with assurance w.r.t applicability & transparency.
• Lessons Learnt:
• Appropriate disclosure (in addition to Annual Reports) and Communication on remuneration levels.
• A well considered position must be taken before submission of a final recommendation to Cabinet.
CONFIDENTIAL 1111
CONFIDENTIAL 1212
QUESTIONS?QUESTIONS?