New act will reveal wage disparity

Listed companies and state-owned entities are now required to disclose the pay gap between the highest and lowest paid employees as part of changes to section 30A and 30B of the Companies Act that were signed into law by President Cyril Ramaphosa in May.

The amendments, intended as a way of addressing income inequality, shift pay gap disclosure from voluntary to mandatory. Companies are now required to table annual remuneration reports in line with fair pay principles. The reports require the approval of 50%+1 of shareholders at an AGM — down from 75% previously — and are valid for three years.

The wage disclosures will include, among other things, the total remuneration of the highest-paid employee, the remuneration of the lowest-paid employee, the average total remuneration of all employees, the median wage and the ratio between the total pay of the top 5% and bottom 5% of earners.

The voluntary governance principles found in the King Code needed legislative support to bring about any real change in the South African commercial landscape

—  Phillip Kruger

There have been concerns about rising inequality in South Africa and the amendments seek to align the economy more closely with international standards such as those applied in the EU and the UK, where binding or semi-binding remuneration frameworks are in place.

Phillip Kruger, a director in the legal department of RSM South Africa, an assurance, tax and business consultancy, told Business Times that the changes pave the way for pay transparency.

“The amendments bring about a dispensation where transparency, accountability and fair remuneration practices are paramount... to ensure the entities meet their legislative compliance requirements,” he said.

Kruger said the disclosure of executive remuneration had been regulated by section 30 of the Companies Act, which confined the disclosure to an aggregated basis, as opposed to on an individual executive level.

Voluntary disclosures were required under King IV in 2017, he said, but statutory intervention was deemed to be necessary to effectively address the often-excessive pay gaps between executives and workers.

“In essence, the voluntary governance principles found in the King Code needed legislative support to bring about any real change in the South African commercial landscape,“ Kruger said.

“Typically, historic reporting may have provided compliant disclosures in respect of the previous iteration of section 30, [but] such disclosures could still be challenging to interpret, vague and not standardised in accordance with international best practices.”

Leila Ebrahimi and Makhosazana Mabaso, remuneration specialists at PwC, said in a joint comment on the amendments that they made it possible for a “universal floor”, meaning firms will now produce comparable data points.

“There is a risk that the disclosure generates noise rather than insight if it is not accompanied by meaningful narrative context. The legislation creates the obligation to disclose; it does not, on its own, create the understanding that makes disclosure useful. That is the work that companies will need to do themselves,” said Ebrahimi and Mabaso.

Whether this translated into real change depended entirely on how companies responded to it.

“If it is treated as a compliance exercise, producing the numbers without engaging with what they reveal or performing any deeper analysis beyond the surface level requirements of the act, the disclosure will inform but it will fall short of being transformative in the way that many are hoping for,” they said.

They said the amendments will help companies that use them to genuinely understand income distribution and to develop pay policies to mirror their values.

Nicole Martens, executive director of the NPO Just Share, said binding votes on remuneration policy and implementation are an important and overdue step towards addressing persistent concerns about excessive pay and weak alignment with performance.

Martens however said, the proposal to raise the shareholder dissent threshold from 25% to 50% risks weakening accountability in practice.

“Even at 25%, shareholder opposition has often struggled to drive meaningful change. A higher threshold sets the bar so high that it may blunt shareholder voice, particularly in a market with concentrated ownership and wide wage gaps. Simplification should not come at the expense of one of the few mechanisms that gives shareholders real leverage on executive pay,“ she said.