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

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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.

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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.

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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.

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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)

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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?

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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.

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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?

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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

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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.

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QUESTIONS?QUESTIONS?