Do top Kenyan CEOs earn their pay?

By Kenneth Kwama

Pay for chief executives have climbed to dizzying heights, even as the economy slows to a crawl, and investors at the stock market watch their money evaporate.

The most recent analysis by audit and management firm, PriceWaterhouseCoopers, shows that it would cost you Sh2.53 million today, to hire the top ranked CEO in the financial services sector (the most expensive), up from Sh2.23 million in 2005.

The average cost of employing a CEO in Kenya is Sh1.03 million, while the lowest cost was recorded in the trade sector, with a median salary of Sh274,083.

This is 316 times more than the Sh8,001 that the companies are expected, by law, to pay their messengers, cleaners and janitors each month. It equates to about Sh10,541 an hour for the CEO.

This means that CEOs in the most profitable companies in Kenya drink from the same trough as their counterparts in America and the European Union, where the average public company CEO compensation is 400 times that of the average employee, yet our economy is nowhere near the same size.

Best paid ceo

The current survey was carried out in 2007, and covered 123 companies across all sectors of business. Collectively, the 10 best-paid CEOs made Sh303.6 million last year. The accounting firm says these salaries have since adjusted upwards.

Many of these CEOs also have exit clauses in their contracts, that entitle them to millions of shillings should they be forced to leave before their due time.

Most members of this stratospheric CEO club work in leading financial companies that have recorded huge profits in the last two years, despite the economic slow down. By inference, this means that the top executives in the five biggest banks in Kenya, Barclays, Standard Chartered, Equity, Kenya Commercial Bank and Commercial Bank of Africa drew a collective Sh151.8 million in salaries last year.

However, they still cannot beat the top executive of Safaricom, East Africa’s most profitable company, who is believed to earn the best package all round.

Best package

PwC’s Head of Human Capital in East and Central Africa Mr Kuria Muchiru refused to be drawn into discussions about Safaricom CEO’s pay, saying his firm could not comment on specific salary scales of companies or individuals.

According to the PwC report, the average cost of employing a CEO in Kenya is Sh1.03 million, while the lowest cost of employing a CEO was recorded in the trade sector, with a median salary of Sh274,083, down by 58 per cent from Sh434,202 per month in 2005.

"We are certain that the sample population is representative of the Kenyan market and the sample size provides an accurate picture of the remuneration and human resource practices in Kenya," reads the PwC report titled: The 2007 Human Resource Survey.

The PwC survey is conducted every two years, and the details later availed for sale to individual companies. Another survey is due this year, and Muchiru says they expect slight improvement of the compensation terms.

"It is expected that salaries have been adjusted since the 2007 Survey. However, with the current global economic crisis and the effects of the post election violence that plagued our nation in early last year as well as the escalating inflation rates, there is the possibility that the rate of pay increase and increments awarded may not be as high as expected or even compared to previous years," says Muchiru.

Median pay

The PwC review of compensation for cost of employment in companies also found that the median pay package for assistant accountants in the professional services sector was the lowest, at Sh10,000 a month.

The equivalent position in the 2005 survey was a first level supervisor from the manufacturing and processing sector, costing Sh13,230 monthly.

The PwC formula, based on data from the past two years, added up salary, perks, bonuses, above-market interest on pay set aside for later, amongst other things to reach these conclusions. Although the survey was not particular about how the effectiveness of such CEOs is judged, the common yardstick locally used to judge a CEO’s performance is the company’s annual returns.

In the US and Europe, such grading uses two key factors. One is the company’s stock performance (including dividends) relative to that of its industry peers over six years. It also factors in annualised stock performance during the CEOs tenure and its performance.

Firm’s performance

But PwC’s analysis found that CEO pay rose and fell regardless of the direction of a company’s stock price or profits.

The past two years have been rocky for the Kenyan economy, and the stock market, which would have made them useful tests of a concept called pay for performance — a term companies use to sell shareholders on the idea that CEOs are being paid based on how well the company does. "This would have meant that none of the CEOs whose companies are listed at the NSE would have made it as a good performer.

All, including Michael Joseph of Safaricom whose company made phenomenal profits last year and Mwangi, whose bank Equity, recorded more than 100 per cent increase in profits over the previous year’s results, would have flopped," said a highly placed source working in a reputable accounting firm who requested not to be named.

This means that while you can tell who earns what from the survey, it doesn’t factor in the performance versus pay scorecard, which means that one still cannot tell which CEO delivered the best bang for the buck from the survey.

However, if most of these factors were to be considered, Equity Bank’s James Mwangi would stand out as the chief executive who delivered the most value for money.