The Shoprite pay puzzle

Why did 28% of the retailer’s shareholders veto its pay policy, even though CEO Whitey Basson hasn’t had an increase for three years?

It’s almost impossible to pay a top executive well enough,” says Johann Rupert, the 65-year-old chairman of Remgro and Richemont, speaking to this magazine two weeks back. “Take [Shoprite CEO] Whitey Basson: how can anyone tell me that Whitey is paid too much, considering the wealth he’s created for shareholders?” he asks rhetorically.

Rupert has a point: in the past five years, Shoprite’s net asset value has nearly trebled, from R13,99/share to R35,70, while its share price has risen 45%.

Still, it seems not all Shoprite’s investors agree.

At the retailer’s AGM in Cape Town this week, an eye-catching 28% of investors voted against Shoprite’s remuneration policy.

What makes this so remarkable is that there were no egregious excesses to speak of in Shoprite’s remuneration plan for the top brass.

In fact, Basson’s salary has stayed constant at R49,6m — the same level as three years ago. Cumulatively, the salaries of all Shoprite’s executive directors actually fell 4,6% to R102,9m.

Nols Louw, chairman of Shoprite’s remuneration committee, tells the Financial Mail that Basson “elected to forfeit his salary increase for the past two financial years”. Louw says this was because Basson felt “it was the right thing to do in view of the current economic climate”.

Shoprite’s executives could even justifiably have argued for a salary hike, considering that for its recent full financial year, trading profit rose 10,7%. So why the 28% “no” vote? According to Louw, a number of Shoprite’s investors voted against the pay policy because Basson’s pay “has no variable component”. In other words, under the deal struck between him and chairman Christo Wiese 20 years ago, Basson gets most of his reward from a salary unconnected to whether he achieves his specific targets.

At the AGM, Wiese defended Basson’s contract. “[That contract] was struck on a certain basis, meeting the circumstances of the time. Personally, being the largest shareholder in Shoprite, I’ve always been happy with the deal because it worked, by and large, for shareholders.”

It’s not yet clear who voted against the pay policy, but this probably includes the Public Investment Corp (PIC), which owns 12,6% of Shoprite.

Last year, the PIC said Shoprite’s policy was “inconsistent with best practice” because “operating profit is the only financial metric for determining the short-term incentive plan” for the executives.

Still, if you consider that nearly a third of Shoprite’s investors vetoed the directors’ pay — even though the quantum dropped — you’d have to say this marks a bold new frontier in shareholder activism.

If it was true a few years ago that institutions and asset managers typically rubber-stamped resolutions without thinking, those days appear, thankfully, to have vanished.

This will come as a shock to some, who feel, wrongly, that the media shouldn’t be writing about corporate pay. Perhaps it ruffles feathers. Perhaps it just embarrasses their friends — who knows?

But this is totally at odds with what’s actually happening at the investment houses. Portfolio managers tasked with investing pension savings have found their voice on executive pay — alert to the blindingly obvious fact that people perform according to incentives.

For others, this new activism marks a big threat.

Wiese summed up why this should be so at this week’s AGM, while defending Shoprite’s pay.

“The one thing that I do know, and that I find abhorrent and which will never happen in our [company], is where people run companies into the ground and still get remunerated very handsomely,” he said.

There are more than a few instances of this among JSE-listed companies, which find every wafer-thin excuse in the book to excuse blundering CEOs. But if the corporate sector wants to speak with any credibility about accountability, it should start in its own boardroom.