Roundtable discussion: CEO Incentives—It’s Not How Much You Pay, But How

The question of getting alignment between shareholders and managers of businesses on the JSE and how to use appropriate incentives to achieve that was thrown into stark relief recently after chicken player RCL’s AGM on the one hand and Astral’s results on the other…. There are some pertinent comparisons which illustrate which companies are getting EVA right and which aren’t. Astral which utilizes EVA to incentivise all its employees was SA’s second largest chicken producer behind RCL Foods Rainbow Chickens. But a relentless focus has resulted in Astral now being SA largest producer with a 26% market share versus RCL Foods in second position with 20%. On virtually every measure Astral is a far superior investment to RCL, despite (some would say due to) RCL bolting on food (Foodcorp), Sugar and Logistics to its offering to reduce its exposure to the highly cyclical chicken industry. Astral has dramatically and consistently outperformed RCL in terms of Total Shareholder Returns and earned very substantially higher returns on capital. None of this becomes surprising given RCL executives have historically been incentivised with misaligned incentives like Profit before Tax which ignore the cost of shareholders capital. Michael Avery speaks to Chris Logan of Opportune Investments and David Holland of Fractal Value Advisors and Adjunct Professor at the University of Cape Town Business School, about CEO incentives: it’s not how much you pay, but how