Marc Hasenfuss: Market Watch

that Sovereign has made marked operational progress in the past three years.

The fact remains that these incentives to top management are equivalent to around a quarter of Sovereign’s operating profit before depreciation and impairments in the year to endFebruary 2015. That’s a chunky, chunky number. The quantum of the total performance incentive is considerably bigger than the dividend paid to shareholders in the 2015 financial year.

It’s possible to work out the Sovereign directors and staff costs even further by comparing the company to the JSE’s “big bird”, Astral Foods. Astral, a R10bn/year business with a market capitalisation of R7bn, paid out R2,1m in nonexecutive fees in its past financial year. Sovereign, with annual sales of R1,6bn and a market capitalisation of around R600m, paid its nonexecutives R3,5bn.

More startling, however, is that employee costs at Astral came in at under 12% of revenue in the year to end April 2014, compared with around 18% for Sovereign in the year to endFebruary 2015.

While Sovereign’s margin, at 6,7%, was considerably higher than Astral’s 5,1% for the most recent full financial year, shareholders might be fantasising about how much more Sovereign’s margin could be if it could match Astral’s employee cost-to-revenue ratio.

Perhaps shareholders at the Sovereign AGM might be so bold as to rattle the directors’ cage by suggesting that the employee cost numbers be brought closer in line with their market-leading rival before executives take rewards for performance.

Granted, the executive incentives are well-intentioned in terms of key staff retention, and it certainly would be tough to replace the company’s astute CE Chris Coombes (and others). But when directors — especially if they don’t have a huge stake in the company — seem to be feathering their nests at the expense of shareholders, shareholders are likely to crow loudly.