Reconsidering CEO terminations

Online since 1.03.2017 • Filed under Corporate Governance • From Issue 5 - March 2017 - August 2017 page(s) 16
Reconsidering CEO terminations

Executive pay is a hot topic for shareholder and stakeholder activists, but nothing gets people’s blood pumping faster than a CEO who walks away from a disastrous performance with a substantial golden parachute.

‘Companies need to reconsider the way they handle CEO terminations to avoid arousing controversy and appearing to pay for failure,’ says Martin Hopkins, Executive Committee Member at the South African Reward Association (SARA) and a partner at PwC in the People & Organisation practice.

For example, a prominent South African company recently paid its CEO a golden handshake of more than R20 million following a disastrous event on his watch.

‘We must recognise that there may be sound commercial reasons why companies take the pragmatic course of essentially paying a CEO to leave, but it is not recommended from a governance point of view because it sends the wrong message to staff and shareholders, and severs the vital link between pay and performance,’ Hopkins insists.

Well-defined process required

It is important to recognise that the issue of CEO termination pay-outs is not necessarily as clear-cut as it may initially seem. South African labour law is extremely employee-friendly; dismissing a CEO for non-performance would require a proper process to be followed. It is likely to take between one and two years to dismiss a CEO, during which time the company would be disadvantaged by having no proper leadership.

‘It’s a process that involves lawyers and intense media scrutiny with all the reputational and other risks that implies, so you can see why it makes business sense to shut down that particular circus and avoid a prolonged, public washing of dirty corporate linen,’ he adds.

Legal factors to consider

Another factor is that CEOs who are dismissed would be entitled to substantial pay-outs in terms of the law.

At a minimum, a termination package includes notice pay – for CEOs, six months is best practice – plus two weeks’ salary for every year worked. Share awards that have not yet vested would also be paid out on a prorated basis.

Frequently, the notice pay is subsumed within a ‘lossof- office’ payment which, while not mandated, is generally considered reasonable. Hopkins says that around one year’s salary is considered acceptable.

‘In other words, a CEO who is dismissed or asked to leave would leave with a substantial sum of money based on perfectly legitimate grounds. But what must be avoided is any implication that executives are not subject to the same strictures as other employees who are penalised for poor performance.

‘All employees, including CEOs, need to be treated fairly but it may be time for companies to bite the bullet and go through due legal disciplinary processes leading to dismissal in the case of poor performance of senior executives,’ Hopkins concludes. For more information, visit www.sara.co.za

Issue 5 - March 2017 - August 2017

Issue 5 - March 2017 - August 2017

This article was featured on page 16 of SABI Magazine Issue 5 - March 2017 - August 2017 .

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