Major changes coming for South African salaries

A controversial amendment to South Africa’s Companies Act, aimed at promoting pay equity, could backfire by causing job losses for lower-paid employees and pay increases for top executives.

This was explained by André de Lange, Director in the Corporate & Commercial practice at CDH, in an interview with Newzroom Afrika. 

His comments come after an amendment to South Africa’s Companies Act has been signed into law that will require companies to disclose the pay of their highest and lowest-paid employees. 

While the hope is that it will lead to higher wages for the country’s lowest-paid workers, it may result in them losing their jobs and top executives getting a pay bump. 

On 26 July, a Presidential announcement explained that President Cyril Ramaphosa signed the Companies Amendment Act into law. 

It is unclear when the amendments will become operational and whether the President will proclaim one date or a staggered implementation over a period of time.

The Amendment Act seeks to introduce several changes to the Companies Act that are meant to promote the ease of doing business and impose greater corporate transparency on the earnings gap between the highest and lowest-paid persons in a company.

The adjustments to remuneration policies have been particularly controversial, garnering mixed reactions from the public.

The Act aims to achieve equity between directors and senior management, on the one hand, and shareholders and workers, on the other.

It addresses public concerns regarding high levels of inequalities in society by introducing better disclosure of senior executive remuneration and its reasonableness.

Bowmans’ attorneys Cathy Truter, David Yuill, and Martin Hopkins explained that these changes will be implemented in two major ways. 

For public and private companies required to be audited under the Act, remuneration disclosure requirements in annual financials will now need to list each individual director and officer by name rather than by grouping or anonymously.

“This amendment is anticipated to result in greater public scrutiny of private company affairs where companies are large enough to meet this threshold of public interest,” Truter, Yuill and Hopkins said. 

Public and state-owned companies will need to prepare a remuneration policy and report, which must be approved by shareholders.

This report must include the company’s remuneration policy and an implementation report detailing the total pay received by each director and key officer, as well as the highest and lowest-paid employees.

Additionally, companies must report the average and median pay of all employees and disclose the pay gap between the top 5% highest-paid employees and the bottom 5% lowest-paid employees.

The risks

While this amendment is intended to ensure that all employees are paid more equitably, De Lange warned that this change may not necessarily have the desired effect. 

“Obviously, the Act is aimed at reducing the gap between the highest earners and the lowest earners, and that’s a very laudable objective. Whether the Act is going to achieve that is a different story,” he said. 

He explained that companies could decide to get rid of their lowest-paid employees and outsource those services instead to avoid disclosing their pay. 

This risk is especially pronounced in companies with large pay gaps, which may be “embarrassed” to disclose their remuneration. 

De Lange said that mitigating this risk would be difficult since companies may have good reasons for outsourcing, which have nothing to do with the pay of their workers. 

He explained that the Act would likely not have the desired effect on the pay of senior executives either. 

Currently, the Companies Act requires certain companies to disclose the remuneration of their directors in their annual financial statements.

While one may think that this would have the effect of lower pay for senior executives, De Lange said that the opposite is actually true. 

“Often what happens is other companies look at that and almost use it as benchmarks for their own remuneration,” he said.

“So, instead of having a downward pressure, disclosures like that can sometimes have an upward pressure.”

Despite the challenges the Act faces, many are hopeful about the effects that increased transparency will have on the wages of South Africa’s lowest-paid workers. 

De Lange said that in a country like South Africa, there are probably quite significant discrepancies between the lowest and the highest-paid employees in a company, which the Ammendment Act could help address.  

“Hopefully that would lead companies to look at the lower remuneration and do something about that,” he said.

“The shareholders obviously also play a role in this because they ultimately have to approve the remuneration policy, and they can use their vote to place pressure on the companies to do the right thing.”