Monday comment2
Yes, considering what they put in and the operating environment, writes Ruth Sanwo
It’s impressive that a recent online post on the 2018 list of highest paid CEOs of quoted Nigerian companies, has fuelled young corporates, to aspire to do more. One would think that these numbers would baffle the average Nigerian and be a cause for discussion on the huge disparity between the rich and poor, but, the reverse was the case. The piece which has run in print and on social media has got a lot of traction, and yes people should be encouraged by the sums these CEOs are earning. But it’s surprising that not one person questioned the huge disparity in salaries between companies and countries. It’d be foolhardy to expect the same salary across board, after all there are significant differences in performance and currency, but should the disparity be so significant?
As expected, CEOs in the oil and gas sector earn the highest, with the CEO of Seplat coming in first followed by the Group Chief Executive of Oando with packages of N1.7 billion (US$4.86 million) and N568 million (US$1.6 million) respectively. Both companies are leading indigenous companies listed on the Nigerian Stock Exchange, with Seplat having a second listing on the London Stock Exchange. Other big earners were in the FMCG and banking sectors, with the highest FMCG CEO being Baker Magunda of Guinness Nigeria earning N461 million (US$1.3 million) and the highest paid bank CEO earns N384 million (US$1.1 million). The least paid CEO on the list earns a salary of N125 million (US$357,000).
A social media influencer posted the news on his handle and asked Nigerians how they felt about the list, excited or angry. One Twitter commented, “It inspires me as I know I just started and I can go higher than this. Tough times don’t last, tough people do.” Another said, “It makes me happy, it tells me there is alignment in rewards and strong company performance.” On the flip side, another Twitter user pointed out that these CEOs are the very zenith of the corporate ladder in Nigeria and with earnings hovering around the $1 million mark it’s a sad comparison to their international counterparts. The Twitter user rightly noted that it was unlikely that these CEOs would earn up to $20 million within the next 10 years. This is shocking, but a valid concern when you compare the pay packages of the highest paid Nigerian CEO to his counterpart in the United States – the highest earning Nigerian oil and gas CEO earned US$4.86 million in 2018 while his counterparts at Shell earned US$23.79 million (N8.3 billion) in 2018, up from US$10.06 million in 2017 (N3.5 billion) and the CEO of Exxon Mobil US, reported a 2017 pay package of $17.5 million (N6.1 billion).
The banking sector is not any better. While the highest earning CEO in the Nigerian banking sector earned approximately US$1.1 million, the lowest earning bank CEO in the UK in 2017 was Ross McEwan of the Royal Bank of Scotland with a total pay of UKGBP3.487 million (N1.6 billion / US$4.6 million). The highest earning UK bank CEO in 2017 and 2018 was Antonio Horta-Osorio of the Lloyds Banking Group with a pay package of UKGBP6.4 million in 2018 (N2.98 billion / US$8.5 million). Even then the British figures pale in comparison to JPMorgan’s Jamie Dimon who made US$31 million (N10.85 billion) in 2017, which is more than UKGBP23 million.
The FMCGs are no better either. In 2017 Ulf Mark Schneider, CEO of Nestle Switzerland took home US$9.5 million (N3.3 billion); Paul Polman of Unilever, UKGBP10.3 million (N4.78 billion) and Ivan Menezes of Diageo UK US$4.4 million (N1.5 billion). The Nigerian numbers seem disproportionately large because they are in the billions but we must ask ourselves are they really so high?
In general, CEOs of the largest publicly traded U.S. companies averaged $14.3 million in annual pay, more than double that of their Canadian counterparts, significantly more than their British counterparts and 10 times greater than those in India. So disparity across countries is the norm but how much of a disparity is acceptable?
You could argue that being in a developing country with a weaker currency, our CEO pay packages can’t be at par, and thus a huge disparity should be expected. I beg to differ. Shouldn’t the fact that Nigerian CEOs work in a more challenging terrain mean that they should earn considerably more? Not at par or the same as their counterparts abroad but significantly more?
The Nigerian CEO is faced with an environment like no other; despite significant work done by the current government in improving our ranking on the World Bank’s Ease of Doing Business, Nigeria still came in at 146 out of 190 economies. Rwanda (29), Kenya (61), South Africa (82), Ghana (114), Uganda (127) to name a few ranked higher than Nigeria. And just in case you need reminding on the local business challenges let’s start with bank interest rates that are double digit figures, epileptic power supply with some companies having to generate their own power, poor infrastructure, corruption, to name a few.
Against this backdrop are Nigerian CEOs who are running profitable businesses, year-on-year profits I might add, who are expanding their global footprint by opening offices outside of Nigeria and Africa and even going so far as listing on international stock exchanges. I challenge any CEO in the UK or US to be able to successfully traverse the landmine that is the Nigerian business climate and consistently come out wining.
There is a lesson to be learnt here: CEOs especially in tough operating terrains like Nigeria are paid less than the value they bring to their companies. More concretely, these CEOs capture only about 34 per cent of the value they bring to their organisations.
Some could argue that we leave our international counterparts out of this conversation and look inwards; that in a country like ours, with a weak currency, any person earning over half a million dollars annually is already earning too much. But there’s an economic case for the stratospheric level of CEO pay, especially in the developed world, and there’s no reason why that case shouldn’t be applicable to CEOs working twice as hard due as a result of a challenging business environment. The economic case suggests that shareholders, even if they had full say, would not reduce CEO pay packages. In fact, they’re likely to let the CEO pay continue to soar. That’s because of a fundamental shift in the structure of the economy over the last four decades, from oligopolistic capitalism to super-competitive capitalism. CEO pay has risen astronomically over the interval, but so have investor returns.
The proof is in the numbers. For example between 1980 and 2003, the average CEO in America’s 500 largest companies rose six fold, adjusted for inflation. Outrageous? Not to investors. The average value of those 500 companies also rose by a factor of six, adjusted for inflation. In 2005, for example, Exxon Mobil reported $36 billion in profits. Its former chairman, Lee R. Raymond, retired that year with a compensation package totalling almost $400 million, including stock, stock options and long-term compensation. Too much? Not to Exxon’s investors, who enjoyed a 223% return over the interval, compared to the average 205% return received by shareholders of other oil companies, a premium of about $16 billion. Raymond took home just 4% of that $16 billion.
It’s interesting to note that in Nigeria, like the rest of the world conversations are starting to shift from how high a CEOs pay is to the value the CEO brings. Under the leadership of Antonio Horta-Osorio, Lloyd Banking Group saw its financial performance turn around and the bank finally returned to profitability. In 2014, Horta-Osório saw his pay increase more than 50% to UKGBP11.5 million as a result of this return to profit. These same CEOs are punished where they don’t deliver, a case in point – Anshu Jain and Jürgen Fitschen of Deutsche Bank who were forced to step down after repeated crisis and the bank repeatedly falling short of its own profit forecasts. Another example is John Stumpf, former CEO of Wells Fargo who was forced to leave the company after an internal corporate scandal. More recently, Deutsche Bank’s British CEO, John Cryan, was ousted earlier this year for the bank’s continued poor performance. A recent study of CEO tenure has found that the percentage of forced turnover tripled between 1970 and 2006, and another study concluded that Boards of Directors now “aggressively fire CEOs for poor industry-adjusted performance.”
So more than ever the pressure is on to deliver on all matrices and to be rewarded accordingly. It’s gratifying to note that of the 13 companies mentioned in the Business Day piece eight have seen an increase year-on-year in turnover from 2016 to 2018. The most significant increase being for Seplat from N63 billion in revenue in 2016 to N228 billion in 2018. Every single one of the mentioned companies is returning good profits with nine returning an increase in profit year-on-year from 2016 to 2018. With some companies turning around losses into significant profits, Guinness Nigeria (from a loss of N2 billion in 2016 to a profit N6.7billion in 2018), Oando PLC (from a loss of N25.8 billion in 2016 to a profit N28.7 billion in 2018), Cadbury (from a loss of N296 million in 2016 to a profit N823 million in 2018) and Seplat (from a loss of N45 billion in 2016 to a profit N44.87 billion in 2018). Validating that these CEO salaries and more are justifiable.
To further justify their earning it is important to note that talented CEOs possess impressive but very scarce leadership skills. Generous pay packages merely represent the market forces of supply and demand. If there was an oversupply of people with such unique qualities, market forces would bring their salaries down.
I’d like to end on a positive note by applauding these listed companies and others like them for disclosing their salaries, such openness speaks to good corporate governance and a changing business model in Nigeria. One that sees the value in transparency.
In a country where tax evasion is rife, with only 19 million out of an estimated 70 million economically active citizens paying tax in 2018, being upfront about your salary is the surest way to get the attention of the Federal Inland Revenue (FIR). In this case their transparency shows that they are the privileged 1% and thus amongst Nigeria’s highest tax payers contributing significantly to the coffers of the economy. It’s refreshing to see CEOs supporting the economy through the building of strong businesses, employing labour and through payment of taxes.
Sanwo wrote from Lagos
