Share-based incentives for South African CEOs: Trends 2002−2015

Abstract

Share-based incentives, which theoretically align executive and shareholders’ interests (agency theory), comprise a significant portion of executive remuneration. Detractors propose that such incentives could allow rent extraction (managerial power theory). To enable proper governance, stakeholders (both shareholders and regulators) need to be aware of the characteristics of share-based incentives. The aim of this study was to evaluate the trends relating to executive share-based incentives, as well as the reliability of available data sources thereof, in South Africa. Firstly, a trend analysis (2002−2015) was done for companies listed on the Johannesburg Stock Exchange. Share options were the most popular share-based incentive until 2008, but were then replaced by share appreciation rights (SARs) and later by full quantum schemes (performance and restricted shares). Compared to global evidence, SARs were popular for longer and full quantum schemes became prevalent later in South Africa. Increased use of full quantum schemes in later years signal improved alignment of executive/shareholder interest (in line with the agency theory). This study, secondly, commented on the reliability of the IRESS financial database in recording share-based incentives, when compared to the annual financial statements (AFS). Numerous discrepancies in IRESS significantly detracted from its usefulness as a sole data source when evaluating executive share-based incentives. Divergent disclosure practices in the AFS increased the risk that executives in South Africa could be utilising share-based incentives to extract rents from companies. It is recommended that regulators should prescribe comprehensive standardised disclosure for share-based incentives.