Ethics and remuneration

Follow these practical steps to ensure your payroll is managed ethically.

Remuneration is generally one of the most sensitive issues in the workplace. This warrants that remuneration is managed ethically, in line with all applicable legislation and the company’s policies and values, and that the necessary structures and processes are put in place to ensure this. This includes a remuneration committee and a clear remuneration policy.

While such structures and systems should avoid dissatisfaction, in reality it is not always the case. Employees are often not satisfied with their remuneration because it is perceived to be too low, and many more are dissatisfied with what senior executives earn because it is seen as being too high. Increased wage demands are often a primary factor in industrial action – as was the case in the strike in the South Africa platinum sector which started in January 2014, making it the longest strike in the industry’s history. There is also the issue of unequal pay for women.

To minimise the extent to which remuneration decisions are seen to be unfair, discriminatory or based on favouritism, the organisation should be as transparent as possible about its processes and decisions. When necessary and where possible, the company should engage with its employees to address and, ideally, to resolve their grievances – or at least to reach a mutually acceptable compromise.

However, wage disputes, especially those involving unions, are often much more complicated and cannot be addressed with a few recommendations, no matter how sound they may be. The issue of executive remuneration is also a very contentious topic. International media headlines continue to be dominated by executive pay rises and bonus schemes that are in stark contrast to workers’ wage demands.

A British campaign group established to monitor executive pay and set out a road map towards better business and economic success, the High Pay Centre, suggests top executives earned more in just over two days than the average United Kingdom worker takes home annually. The study reported that executive pay increased by 74% over the past decade, while wages for ordinary workers remained flat. Quoted on Sky News, High Pay Centre director Deborah Hargreaves said: “When top bosses take home more in two-and-a-half days than the average worker earns in a year, there is clearly something wrong with the way pay is set for both bosses and workers”.

Attention is being given to these inequities, for example, to allow shareholders a greater say in the remuneration policy. From a corporate governance perspective, Principle 2.27 of King III recommends that “shareholders should approve the company’s remuneration policy”.

This has been written into law for shareholders in South African banks, who have been given a greater say in the design of remuneration policies governing the pay of top executives and directors. In August 2013, Parliament’s Finance Committee included a clause in the Banks Amendment Bill that would require the remuneration committee of the board of directors to consult with shareholders about the bank’s remuneration policies. The insertion does not, however, specify how and when this consultation should take place.

By way of improvement, PwC’s report, Executive Directors’ Remuneration – Practices and Trends Report: South Africa 2013, found that nearly 40% of CEOs in financial services are changing the way they set executive rewards in response to shareholder and public reaction.

Dr Mark Bussin, in his book Remuneration and Talent Management, identifies a number of trends that are aimed at more ethical results:

• increased scrutiny of performance metrics selection;
• the introduction of more long-term incentives to encourage ethical behaviour and increase retention;
• more performance-based instruments;
• a decline in complex, opaque pay plans; and
• the rise of indexed share remuneration and limits on share-based compensation.

It is to be hoped that research such as this, coupled with on-going investor and stakeholder scrutiny, will increasingly create more equitable remuneration systems.

There are two other issues that are especially relevant to the subject of ethics and remuneration that warrant attention: monitoring the payroll function and the effective management of garnishee orders.

Monitoring the payroll function

Payroll fraud is real and represents a threat to all organisations. At the Gauteng Department of Health, an internal audit in early 2014 resulted in 143 “ghost” employees being removed from the payroll, saving the province more than R1.2 million.

The general extent of remuneration-related fraud is revealed in the Association of Certified Fraud Examiners’ (ACFE) 2012 Report to the Nations on Occupational Fraud and Abuse. The report is based on 1,388 cases of occupational fraud in nearly 100 countries on six continents that were reported by the Certified Fraud Examiners who investigated them. The findings reveal that:

• Payroll fraud happens in 27% of all businesses;
• Small businesses with fewer than 100 employees are more vulnerable to payroll fraud. It was found to occur nearly twice as often (14.2%) in small organisations with fewer than 100 employees than in large ones (7.6%); and
• The average instance of payroll fraud lasts about 36 months.

To avoid these problems, the payroll system should be audited regularly as part of the internal audit programme and/or by external auditors. This should include that the payroll is reconciled at least quarterly by someone other than the person who runs the payroll. The focus should be on identifying and eliminating remuneration-related fraud such as the falsification or abuse of overtime, or creating “ghost” employees on the payroll.

Managing garnishee orders

A further area of remuneration where HR professionals or the payroll department can make an ethical difference concerns the effective management of garnishee orders. Garnishee orders or emolument attachment orders are issued by magistrate’s courts and compel employers to deduct money owed from workers’ salaries.

The results of a study undertaken by the University of Pretoria Law Clinic, entitled The Incidence of and Undesirable Practices relating to Garnishee Orders – a Follow-up Report, identify many areas of abuse, such as:

• Fraud by court officials who collaborated with law firms applying for orders;
• Orders being granted without the amounts owed being stipulated, resulting in debtors paying instalments with no prospect of ever settling their debts; and
• The charging of excessive fees, incorrect calculations of interest and inadmissible charges being levied.

Verifying all garnishee orders, checking for the accuracy of the amount owing and the fees and interest being charged, and managing the duration of the deductions should be recognised tasks within the scope of payroll officers. HR can also fulfil a valuable role by communicating with employees about the pitfalls of garnishee orders and by ensuring that employees who are affected by these deductions are kept fully informed about the validity and progress of the orders.

To all these issues can be added remuneration tensions among ordinary employees battling to manage financially. It may not be possible to resolve these issues, such as reducing the wage gaps, to the satisfaction of all parties. However, given these problems and accompanying dissatisfactions, organisations should strive to ensure that their management of all aspects of remuneration is completely ethical.

By Cynthia Schoeman
Published in HR Future, December 2014