Remuneration Review Report: progress report by Department of Public Enterprises

This premium content has been made freely available

Public Enterprises

24 April 2012
Chairperson: Mr P Maluleke (ANC)
Share this page:

Meeting Summary

The Department of Public Enterprises (DPE) presented the Committee with what a progress report of its initiative to review and make recommendations concerning the remuneration of executive and non-executive directors working at State Owned Companies (SOCs). The Committee was disappointed that the recommendations were not as close to being finalised as it had hoped, but understood that the venture was a work in progress. Once it was completed, there would be a single enforceable Guideline to regulate remuneration at SOCs.

Meeting report

Remuneration Review Report: progress report by Department of Public Enterprises (DPE)
Ms Orcilla Ruthnam, DPE Chief Director: Governance, relayed the apologies of the Director-General, who was unable to attend the meeting that day. She started the presentation with a broad background and problem statement, and explained that the DPE's State Owned Companies (SOCs) had been following the trends in the local and international market by moving away from a traditional approach to remuneration to one in which the issue was taken into the public domain. This called for a much more active shareholder approach. The biggest challenge the DPE faced in attempting to regulate remuneration for directors involved finding out the full and adequate disclosure of directors' fees, including out of pocket allowance, stipends, and away-from-home allowances. The Department was currently considering different types of fee structures. In 2007, the DPE had developed the DPE Remuneration Guideline to assist in determining appropriate remuneration. That approach had failed to adequately addressed the challenges that were being experienced. Further challenging areas included the evolution of the DPE shareholder function; market forces and shortage of skills, especially in light of the massive SOC infrastructure plans; the Guideline had not being applied in a uniform and consistent manner; and the monitoring and evaluation of the Guideline had been informal and ad hoc. Lastly, the guidelines did not explicitly provide the link between national strategic objects and the remuneration of executives and non-executives.

In response to those challenges, DPE undertook to review the Guideline in December 2010, and a Panel was established for that purpose. Doe to the decision that the private sector would set the benchmark for remuneration, market trends were considered. Four work streams were established by the Panel to give focused attention to matters such as corporate governance. In each of those work streams, the panel had to engage with affected parties, including the SOCs and other government departments. The DPE realised it needed to align the various stakeholder interests, and to reach consensus on the application of the future model.

In initiating the review, a number of material questions had been asked, including looking at benchmarks set for remuneration by the King Report III, JSE listing requirements, and international companies. The DPE also considered whether it should consider uniform implementation of performance agreements for all CEOs and senior executives; the link between remuneration and SOC effectiveness; how to strike the balance between short-term and long-term incentives; and what the alignment of Board fees to the market was.

Some of the key issues considered by the Panel included the fact that in some instances, the DPE Guideline had been followed, but that it had not been uniformly applied. There was a need for trade-offs between remuneration amounts and ability of SOCs to attract skilled directors and executives. Having looked at all of these issues, the Panel submitted its recommendations to the Minister of Public Enterprises. The Minister took those recommendations to Cabinet, which wanted to know how remuneration would be balanced against scare skills and service delivery objectives, and how the DPE could inculcate the culture of public service obligation as opposed to the high risk environment of the profit-driven sector. Cabinet also questioned how to address remuneration challenges within the current legal landscape in which remuneration was the subject of negotiations. Another question was whether officials and executives who were employed within government as well as serving on SOC Boards, should receive additional remuneration. The DPE was currently looking at making some changes to its memorandum of incorporation to address Cabinet's concerns.

The review of the Guideline had shown that shareholder oversight was good practice. The DPE was currently remodeling short-term incentives to be linked to performance against compact targets; examining the practice and methodology to abolish long-term incentives for executive directors; establishing imperatives other than asset and revenue, such as developmental mandate, complexity of the SOC business environment, and funding structure; undertaking benchmark exercises into other regimes; and addressing best practice in Board fees. The DPE was currently working on appointing a suitable service provider to develop the Guideline further, as it firmly believed that function should occur externally.

The DPE was the only shareholder Department that had developed such a remuneration guideline for SOCs. Due to the competition between the public and private sector, attraction and retention of skilled staff was critical. As the DPE and SOC mandate evolved, innovation would be necessary to find better remuneration models that were transparent. The DPE had learned that there had to be appropriate disclosure and communication of remuneration levels. The DPE needed to have a well-considered position before submitting a final recommendation to Cabinet.

Discussion
Dr G Koornhof (ANC) felt there was no real value in discussing the presentation that day. The DPE's presentation referred back to 2007, and then to 2010, when Panel had been formed. The DPE had already approached Cabinet to discuss solutions, but most of the presentation still consisted of problem statements. The Committee wanted the Remuneration Report. There was no point in assessing the Guideline without making accompanying recommendations. The Committee needed to receive the DPE Guideline with recommendations, in order for it to do its job in overseeing the DPE and the Executive. If the Committee did not have enough information before it, it could not perform its function properly.

Mr E Marais (DA) pointed out that it was difficult to draw comparisons between the private sector and the public sector. In the case of the State, the 'shareholders' were the taxpayers. In the case of Board members, remuneration was usually linked to attending Board meetings. In the private sector, the goal of the CFO was to achieve profit, and remuneration was linked to performance. In the civil service, if officials failed to perform and achieve the outcomes for which they were responsible, they should not be paid a bonus or given a golden handshake when they were let go. In the public sector, remuneration should be linked to the performance of specific targets.

Ms N Michael (DA) agreed with Mr Koornhof. The Committee needed a timeframe for when the matter would be concluded. There was currently no cut-off date for when the process would reach its logical conclusion. The Committee wanted to see a link between remuneration and outcomes. She asked whether Public Protector or the Auditor-General had been consulted to give advice on how remuneration should be structured. In the presentation it showed that the DPE Guidelines had not been uniformly applied. That was unacceptable and action had to be taken in order to enforce accountability, both in the context of government and of SOCs.

Mr M Sonto (ANC) said that the presentation was a 'work in progress' which made it difficult for the Committee to engage with it. He wondered how long it would take to complete the process, which in itself should have taken place long ago. He asked what yardstick the DPE had been using for remuneration, and whether it was the same as was used in developed countries. When examining the remuneration of executives in South Africa, it seemed that that was the yardstick that was being used. When considering the remuneration model, he understood that there was a need to retain critical and scarce skills, but that need also had to be considered in light of South Africa's current stage of development.

Mr A Mokoena (ANC) agreed that the presentation was a work in progress. Even though it was desirable to have a timeframe, it would be difficult to put one in place, because it would have to be linked to the National Planning Commission and the Provincial Planning Commissions. In the context of SOCs, both inordinate remuneration and the 'revolving door syndrome' had to be addressed. The information compiled by the DPE could become a strategic planning document that could be used as a model for other departments.

Mr C Gololo (ANC) asked what the remuneration package was for foreign executives in the SOCs, and whether it was equivalent to that paid to South African executives. If there was a difference, he wanted to know why. The Committee had experienced cases in which foreign executives had left their positions at SOCs with large amounts of money. He asked what the DPE was doing to address the issue of executives who had been put on special leave because of participation in corruption or other criminal activities. People in positions like that should not be receiving remuneration. He asked what the DPE was doing about the issue of executives who served on many boards, as that practice needed to be stopped. He also wanted to know whether there were plans afoot to put an end to the practice of executives receiving bonuses even while their companies were losing money.

Ms Ruthnam answered that the DPE had purposefully decided not put a deadline on the finalisation of the Guideline, because it had not yet been widely received. The DPE wanted the Guideline to be accepted in principle before it was cemented into a model that could be used for other state departments. Whatever the DPE finally put forward should be able to 'stand the test of time'. The Panel's recommendations were essentially principles that still needed to be tested by Cabinet. It was still a closed consultation process. Benchmarks for the policies around Board members' remuneration were already in the Guideline. The DPE had not consulted with the Public Protector or the Auditor-General. Currently, it was difficult to take action against SOC management who acted outside of the Guideline. That was why punitive measures had to be included in the Guideline. The DPE attempted to gear its policies towards South Africa's position as a developmental state.

Executives who had been put on special leave were dealt with in terms of the Labour Relations Act. In addition, some companies had their own policies dealing with special leave. The Guideline could not replace the law. The SOCs had to ensure that their policies were in accordance with the Labour Relations Act. Foreign executives who were employed in South Africa had to be employed according to South African law. The point of the Guideline was to inform those policies. Issues of declarations and conflicts of interest also had to be addressed. On the matter of large payments being made to executives when SOCs were not performing well, she said that performance would be one of the variables affecting payment in the Guideline. She agreed with the Chairperson's point that in finalising the Guideline, the DPE should consult with other departments that had shareholder companies.

Mr Koornhof asked what the National Treasury thought about the process, and if it was on board. He wanted to know whether Acting Directors received allowances, to which a representative of the DPE replied that they got acting allowances.

Mr Marais said that in the case of employees, there were clear labour law rules, but that there were not such clear rules in relation to Board Members. Acting positions posed a 'serious problem' in South Africa, especially when such positions were continually renewed for people who did not technically qualify. On the local government level, that state of affairs was being improved, because authorisation was required before an acting appointment could be renewed. Mr Mokoena asked what the DPE was doing about the 'revolving door syndrome'.

Ms Ruthnam said that the National Treasury was currently also looking at a model for remuneration, but that it had a much wider scope. If Cabinet were to decide that the DPE Guideline could be used more widely, that would happen. On the matter of acting executives and acting allowances, the DPE had been fortunate in that acting appointments only existed at the highest levels. The Guideline currently required Board Members to attend at least 50% of Board meetings, and the penalty for failure to do so was dismissal. The percentage was higher for Chairpersons. The 'revolving door syndrome' was a big problem that went beyond the DPE, and was a difficult issue to address. The DPE acknowledged that it needed to try to keep important skills within the public service.

Mr Mokoena asked what happened if a person who had signed an employment contract decided to leave the position for something better during the duration of that contract.

Ms Ruthnam replied that legally, they were entitled to resign under such circumstances. Restraint of trade clauses could not prevent people from leaving their posts.

Mr M Nhanha (COPE) said that when he worked at a municipality and received performance bonuses, he had to ask himself whether he was really deserving. He was paid a salary to do his job, but at the end of each year, he received a performance bonus. He asked why SOC executives should be given performance bonuses for doing the job they were paid to do, and suggested that they should only be paid if they had gone above and beyond the requirements of the job.

Ms Ruthnam replied that performance bonuses were not a bad idea in themselves, but that problems arose when it was not properly stipulated under what conditions those bonuses would be paid. Bonuses should be used as an incentive for people to go above what they were hired to do.

The Chairperson said that the problem was that the so-called performance bonus was usually written into the contract of employment. That caused a serious issue, as it failed to incentivise staff. Ultimately, it had the opposite effect, because people knew that they would receive those bonuses, regardless of their work ethic. The Chairperson thanked the DPE delegation for its presentation, and said that the Committee understood it was a work in progress. It was very important for the Committee to be a part of the process.

The minutes of two previous meetings of the Committee were considered and formally adopted.

The meeting was adjourned.

Present

  • We don't have attendance info for this committee meeting

Download as PDF

You can download this page as a PDF using your browser's print functionality. Click on the "Print" button below and select the "PDF" option under destinations/printers.

See detailed instructions for your browser here.

Share this page: