As the new financial year unfolds, it’s an opportune time to examine the potential trends and changes that could impact director and executive remuneration, as well as general staff pay in South Africa for 2023.
Companies across various sectors have had to adapt to the evolving economic environment and these adjustments have rippled through the remuneration landscape.
Economic impact
Several factors are likely to influence the economy in 2023, which in turn, will impact the remuneration landscape:
- Power outages have caused significant disruptions to businesses, leading to lost revenue, reduced productivity, and increased operational costs. Companies will need to adapt and implement strategies to mitigate the negative effects of the ongoing power crisis that will probably take years to rectify.
- High inflation, above 6%, is putting added pressure on businesses and consumers alike. The rising cost of goods and services may affect companies’ ability to provide salary increases while maintaining profitability and competitiveness in the market.
- Global supply chain disruptions have led businesses to depend more on regional supply chains, resulting in price inflation and possible constraints on revenue and margins.
To maintain margins, businesses across different sectors might resort to cost reduction measures, such as employee layoffs and reduced working hours. Despite high unemployment, wage inflation could persist due to increased centralised bargaining in unionised industries. Conversely, the mining and mineral sectors in South Africa will continue to see high demand, which will exacerbate skill shortages in these industries.
General business spending is anticipated to remain below trend, contributing to a slower GDP growth rate compared to 2022 – forecast below 1% presently.
And how will this affect pay? Given the high unemployment rate and the effects of power outages and high inflation in South Africa, wages for general employees might experience more modest increases, around 4-6% in 2023 (compared to inflation), as companies strive to balance staff costs with economic pressures.
As the economy slows down, board fee adjustments are likely to be more conservative. It is anticipated that board fee increases will be around 4-5% for those companies that decide to adjust fees in 2023.
Executive fixed pay
In the context of a challenging economy, executive fixed pay increases may be limited, with an expected range of 4-6%. However, these figures could vary based on the specific industry, job family, and company circumstances.
Executive incentives – the outlook for executive incentives in 2023 will be mixed. Financial performance targets will be more difficult to achieve, and the focus will shift towards underlying earnings, cash flows, and debt reduction. Meanwhile, Environmental Social and Governance (ESG) measures will continue to gain importance in executive incentives, with LTI measures and weightings undergoing changes. It is expected that more companies will incorporate ESG measures into their LTIs in response to evolving investor expectations. This shift will lead to a higher emphasis on establishing robust and quantitative ESG targets.
As industry funds enhance their in-house governance resources, investors’ independence from proxy advice is expected to increase.
Investors will be keen to see improved cash flow and higher shareholder distributions, considering the rising cost of capital.
In 2023, the markets will need to adjust to greater volatility and a shifting economic landscape, including the challenges posed by power outages and high inflation. Executive pay frameworks and targets will have to account for factors such as free cash flow, lower growth, investment challenges, margin and supply pressures, increased capital costs, changes in industry-specific investor sentiment, persistent talent shortages, and elevated investor ESG expectations. Companies must navigate these challenges effectively to remain competitive and ensure sustainable growth in the difficult economic environment.
Chris Blair is CEO at 21st Century.
