The effect of race on CEO pay-performance sensitivity in South Africa

• Date: 01 July 2016
• DOI: 10.10520/EJC198301
• Pages: 8-29
• Author: Mark Bussin,Sean Barrett
• Published date: 01 July 2016

8 South African Journal of Labour Relations: Vol 40 No 2 2016

Correspondence to: Prof M Bussin, Department of Industrial Psychology and People Management, University of

Johannesburg, PO Box 2334, Saxonwold, 2132. E-mail: drbussin@mweb.co.za

The effect of race on CEO pay-performance

sensitivity in South Africa

by Mark Bussin* and Sean Barrett**

Abstract

South Africa’s labour policies and the growing societal calls to better explain

executive remuneration create a unique opportunity to examine the effects of race

on CEO pay. This empirical research study sought to investigate the effects of

race on the sens itivity of executive pay to corporate performance. The study aims

to con tribute to the literature by providin g an evidence-based approach to

understanding the effect of race on CEO remuneration. The research design was

quantitative, descriptive and longitudinal in nature, utilising validated secondary

data sources. The sample consisted of 19 black CEOs and a random sample of

45 white CEOs. All components of South African CEO remuneration studied were

found to correlate strongly with PAT (Profit a fter Tax) and EBITDA (Earnings

before Interest, Taxes, Depreciation and Amortisation) and to a lesser degree

with ROE (Return on Equity) and HEPS (Headline Earnings per Share). Black and

white CEO mean remuneration was found to show no significant difference as a

result o f race. A notable difference found was the higher degree of pay-

performance sensitivity and variability seen within the black CEO sample. The

study showed that race d oes not affect the level of CEO remuneration but does

impact on pay-performance sensitivity and variability.

Key words: remuneration, compensation, race, minority CEO remuneration, pay-

performance sensitivities, South Africa

1 Introduction

1.1 Key focus of the study

South Africa’s labour policies and growing societal calls to better explain executive

remuneration create a unique opportunity to examine the effect of race on CEO pay.

Past research has revealed a polarised picture regarding the effect of race on CEO

remuneration (Bussin & Modau 2015). This division centres on wheth er race has a

positive impact on the level and sensitivity of remuneration rec eived.

1.2 Background to the study

South Africa has one of the highest levels of income inequality in the world (Tregenna &

Tsela 2012) combined with an official unemployment rate of greater than 25% (Lehohla

2014). South Africa’s 2012 tax statistics show that only 1 2.8% of households earned an

* Prof Mark Bussin is a Professor in the Department of Industrial Psychology and Peo ple

Management at the University of Johannesburg.

** Mr Sean Barrett was a student at the Gordon Institute of Business Science at the University of

Pretoria

South African Journal of Labour Relations: Vol 40 No 2 2016 9

income of over R400 000 per annum and the lowest quintile survived on less than R4

543 per annum. Executive remuneration continues to evoke strong reactions as CEO

packages, bonuses and share options are contrasted with pervasive poverty and

inequality (Bussin & Nel 2015). Shareholder activists are becoming more vocal in their

calls for reform in the ways boards remunerate executives and consider shareholder

preferences (Whitfield 2013 ). Bussin (2013) argues, however, that context is key and

despite the vast and visible inequality gap, attracting, motivating and remunerating top-

performing executives will ultimately grow the economy. Wessel (2006) supports this

perspective and states that CEO compensation is a result of supply and demand for the

executive skills and expertise required to manage large, complex organisations.

Transformation and Black Economic Empowerment (BEE) within the C-suite have

also come under fire in South Africa. Goodman-Bhyat (2013) found that black

executives only accounted for 15% of executive positions while demographically black

people represent 79% of South Africa’s population (Lehohla 2013). Weinstock (2014)

notes that this is largely in line with minority executive representation in the USA. The

typical South African CEO is a white South African male in his fifties earning between

R10 million and R20 million annually and having been in the position for less than five

years (Goodman-Bhyat 2013). Despite the Employment Equity Act 55 of 1998 and the

Broad-based Black Economic Empowerment Act 53 of 2003 black executives remain

under-represented.

Research on the impact of executive minority status on remuneration is divided in its

conclusions as reported in the literature. There are studies that support the view that

minority status is a disadvantage and remuneration levels are adversely affected (Hill,

Upadhyay & Beekun 2014; Park & Westphal 2013; Kulich, Trojanowski, Ryan,

Alexander Haslam & Renneboog 2011; Selody 2010). These are countered by studies

that have found that the minority status of executives is in fact beneficial (McDonald &

Westphal 2013; Zweigenhaft & Domhoff 2011; Hillman, Shropshire & Cannella 2007;

Hillman, Cannella & Harris 2002). The majority of the above research was conducted in

the USA and, as noted by Nzukuma and B ussin (2011), there is limited South African

literature pertaining to black executives and remuneration.

The study of remuneration an d transformation is releva nt in South Africa as it

provides perspective and context on how the public, media and labour drive public

opinion around the topic of executive remuneration. Public opinion, in a functioning

democracy, will drive future public policy and legislation and should thus not be ignored

by business. The uniqueness of the South African business environment is best

captured by Van Melle Kamp and Hofmeyr (2013), who quote the following statement

by a prominent CEO: “corporates have a disproportionate role to play in the

repositioning of th e country, com pared with other countries” (p. 18). This is against the

backdrop of South Africa’s having been rated 136 out of 144 in the 2015 Global

Competitiveness Report when it comes to the relationship between pay and productivity

in general.

1.3 Trends from the research literature

1.3.1 CEO remuneration and corporate performance

At the opening of the 40th World Eco nomic Forum the forme r French President N icolas

Sarkozy stated that there were remuneration packages that would no longer be

tolerated because they bore no relationship to merit (Gevers 2012). This quotation calls

into question the relationship between CEO remuneration and corporate performance.