South African President Cyril Ramaphosa has signed amendments to the Companies Act, raising concerns that businesses might exploit new reporting requirements to boost earnings figures for lower-paid employees, potentially jeopardising their financial security without affecting corporate profits.
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This could lead companies to cut lower-paying jobs or increase outsourcing, creating an unstable job market and fewer entry-level opportunities.
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According to BusinessTech, the new legislation seeks to enhance corporate transparency by highlighting the earnings disparity between a company’s top and bottom-paid employees.
The amendments to the Companies Act require public and state-owned companies to disclose the pay gap between their highest- and lowest-paid employees.
Specifically, companies must reveal the disparity between the total compensation of the top 5% of earners and that of the bottom 5%.
‘This remuneration report must be accompanied by the company’s remuneration policy and an implementation report,’ the Presidency said.
These reports must detail the total remuneration for each director and prescribed officer, as well as for the highest and lowest-paid employees.
‘Among other indicators, companies must report the average and median total remuneration of all employees,’ it said.
Public and state-owned companies must now present a remuneration policy for shareholder approval.
While intended to tackle South African inequality, the new rules could pose risks for lower-paid employees, according to Cliffe Dekker Hofmeyr’s Vivien Chaplin and Haafizah Khota.
The new pay-gap disclosures aim to tackle inequality and improve transparency, but they may bring challenges.
Companies with significant pay disparities will face pressure to address the gap but are unlikely to reduce executive salaries.
Instead, they might report higher pay for lower-paid employees without actually increasing their salaries, finding other ways to manage profits.
The new rules might drive executives to seek roles in countries with more favourable pay policies and lead companies to cut pay gaps by outsourcing low-level jobs.
This could result in fewer jobs and reduced stability for lower-paid workers, rather than increased salaries.
Critics argue that comparing the top 5% of earners to the bottom 5% is an arbitrary choice.
The Palma ratio, which contrasts the bottom 40% of earners with the top 10%, is suggested as a better measure.
This ratio is considered more suitable for developing economies like South Africa, where there are many low-wage workers.
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