In yesterday’s Star newspaper’s Business Report, there was an article on how Beacon, a sweet making division of Tiger Brands, had had to face up to stiff Brazilian competition. For example, by shaving just 1mm off each sweet’s wrapper, they had saved R 3 million in the last financial year. In addition to a continuous improvement programme, Beacon have been helped by increased import duties on their competitors.
This is a good news story for the South African manufacturer, but it got me thinking about what’s going on behind the scenes at companies that need to slash costs to be internationally competitive. So, I went digging. I am sure its not a conspiracy, but at Tiger’s annual results website, the link to their Executive remuneration summary is not working (its the only non functional link on the page). The only way to get at this info is to download the PDF of the entire financials, and wade through to page 73 to get a 6 page explanation of Executive pay principles, followed on page 79 by the chart of actual pay and bonuses. In line with strict accounting standards, share options are NOT accounted for or listed. You have to go elsewhere to get estimates of this information.

There you will discover that the Execs were paid way more than cost savings achieved in Beacon, thus nullifying the competitive advantage so dutifully eked out by the staff at the factory.
In the newspaper report it explains that the savings at Beacon were used for increased promotions, marketing and profit, with some allocated to reducing prices – or so they say! This seems to contradict an earlier statement in the article that indicates that prices are set according to what Beacon feels the customers will pay. You’ve got to wonder what that increased competitiveness buys you, really? Whatever – that’s not my beef with Tiger.
My complaint is that all this cost saving is fantastic, and helps to deal with foreign competition. Yet, when you look at what the Executives were paid, it seems to make a mockery of the efforts of the staff. The CEO, Nick Dennis, received bonuses valued at R 4.8 million in 2006, with all six Executives receiving a total combined package of R 30 million for 2006. This excludes share options – the last valuation I was able to find for these were for Nick Dennis for 2005, and were valued at R 78 million.
This is especially significant since Beacon have created 880 temporary jobs at their factories, but have refused to make these jobs permanent as their “demand is seasonal”. So these 880 workers, who’s combined annual salaries are probably about what their CEO earned last year, get hired and fired as demand cycles come and go. And the poor line managers get incentivised on making the smallest margins even smaller – no doubt tempted to strip capacity and long-term sustainability out of the organisation in order to do so.
Pay them what they’re worth
Now, I understand all the arguments about Executive pay. And, Tiger Brands has better grounds for their decisions than other companies have had, since at least they’ve made profits and the share price has been increasing. Its even more crazy when Execs are paid bonuses for badly performing companies. Its also unfair to pick on Tiger Brands and single them out. This trend is endemic in the corporate world at the moment – all over the planet.
I understand that in order to attract top talent to the top job, you need to pay top dollar. Or so the theory goes. It would seem that the lie in this argument has been exposed over the past 14 months, as closing in on 50 top Execs have resigned or retired from their jobs in South Africa. This trend of departures has also been seen in the USA and elsewhere. It seems remarkably strange to me that these CEOs are leaving at just the time when Sarbox and King II have started to require disclosure of Executive salaries, and there is a huge push from the NYSE to account for stock options. The timing of these departures also coincides remarkably with an extended and unprecendented bull run in global stock markets, with share options now at an all time high for nearly every stock.
So, is it really that these CEOs feel they’ve “done their job”, or is this a “cash in” and “cut and run” attitude being displayed. Take your money while the going’s good, and let some other poor sucker deal with the glare of public scrutiny, and the nasty surprises that await the company over the next decade as it becomes more and more sluggish due to the lack of capacity created by short-term thinking, cost cutting at lower levels and asset stripping!
There are many other reasons why we need to deal with the scourge of Executive pay. More on this topic soon…