President Cyril Ramaphosa signs new pay gap law for South Africa

South African President Cyril Ramaphosa signed amendments to the country’s Companies Act, requiring firms to disclose the pay gap between their highest- and lowest-paid workers.

The Presidency said on Friday that all public and state-owned companies must now report the average and median total remuneration of all employees.

They must also disclose the earnings gap between the total pay of the top 5% highest paid employees and the total of the bottom 5% lowest paid workers.

The Companies Amendment Act “addresses public concerns regarding high levels of inequalities in society by introducing better disclosure of senior executive remuneration and the reasonableness of the remuneration”.

South Africa is one of the world’s most unequal nations, a legacy of the system of racial discrimination that disadvantaged the Black majority and ended in 1994.

Top executives can make in excess of R20 million a year, while the official minimum wage is 27.58 rand an hour.

The Companies Second Amendment Act, also signed by Ramaphosa on Friday, extends the time limit for declaring a director of a company delinquent to 60 months from 24 month and gives the court the power to extend the period if good cause is shown.

Those changes were in response to recommendations of a judicial commission that probed so-called state capture under former President Jacob Zuma.

Cliffe Dekker Hofmeyr’s Vivien Chaplin and Haafizah Khota warned that the new legislation is not without risks.

While it aims to address issues of inequality and enhance transparency, several challenges and unintended consequences must be considered.

For instance, disclosing the pay gap may inadvertently encourage executives to seek opportunities in foreign jurisdictions with more favourable remuneration policies.

Companies aiming to address the pay gap between their highest and lowest-paid employees may seek to reduce the gap through workforce reduction or outsourcing.

Lower-level employees, who are already struggling with comparatively low wages, may face job losses or reduced opportunities.

The legislation has been criticised for comparing the top 5% of and bottom 5% of earners, which appears to be an arbitrary selection.

Commentators have suggested using the Palma ratio instead, which compares the bottom 40% of earners with the top-paid 10%.

This is a far more effective method of describing pay inequality in developing economies, like South Africa.

“The legislation represents a significant step towards enhancing accountability and transparency of executive remuneration,” the law firm said.

However, as with any significant legislative change, there may well be unintended consequences and challenges that arise from its implementation.