South Africa: New Companies Act Remuneration Policy Approval Rules

• Sections 30A and 30B, introduced into the Companies Act 71 of 2008 by the Companies Amendment Act 16 of 2024 and effective May 22, 2026, mandate shareholder approval for remuneration policies and annual reports in public and state-owned companies.
• Repeated failure to secure approval for the remuneration report can lead to the removal of non-executive remuneration committee directors for two years.
• Shareholders apply five key tests to remuneration practices, scrutinizing alignment of pay with performance, the variability of incentive payouts, and the transparent application of discretion.
• Companies must provide robust, commercially sound justifications for executive pay decisions, especially regarding fixed pay increases without performance growth or special awards for new leaders.
• Adherence to King V principles, including active malus and clawback provisions, is expected, and meticulous preparation of remuneration documents is crucial for compliance and governance.

For lawyers and compliance officers advising public and state-owned companies, meticulous preparation of remuneration policies and reports is paramount.

The landscape for executive compensation in South Africa has been significantly reshaped by the full implementation of Sections 30A and 30B, which were introduced into the Companies Act 71 of 2008 by the Companies Amendment Act 16 of 2024 and became effective on May 22, 2026. These provisions impose stringent requirements on both public and state-owned companies regarding the disclosure and approval of executive pay. Specifically, companies are now mandated to present their remuneration policy for an ordinary resolution vote by shareholders at least every three years, or whenever a material change is introduced. This ensures ongoing shareholder oversight of the fundamental principles guiding executive compensation.

Beyond the policy, an annual remuneration report detailing actual pay outcomes must also be submitted for ordinary-resolution approval. The consequences of failing to secure this approval are substantial, particularly for the remuneration committee. Should the annual report fail to pass the first time, the company is required to provide a comprehensive explanation to shareholders, and any long-serving non-executive members of the remuneration committee must stand for re-election. A second consecutive failure to approve the remuneration report escalates the repercussions, leading to the automatic removal of those specific directors from the remuneration committee for a period of two years, underscoring the critical importance of robust ZA remuneration committee compliance.

Shareholders, increasingly sophisticated and demanding, evaluate remuneration proposals through a lens of five critical tests, which legal and compliance professionals must anticipate and address. These tests are not new or obscure; they represent common investor concerns across various markets and demand clear, defensible explanations from company leadership. Each test necessitates a designated owner within the company, a robust fact pack to support the remuneration decisions, and carefully crafted communication that allows the remuneration committee chair to confidently address shareholder queries without hesitation.

The first test, "Alignment, not apology," scrutinizes instances where fixed pay has increased without corresponding improvements in company earnings, dividends, or overall returns. Companies must provide a commercial justification for such decisions within the initial pages of their report, moving beyond generic phrases like "market positioning" or "retention risk." If retention risk is cited, specific evidence demonstrating who was retained, against which alternatives, and the potential loss averted, is expected. Furthermore, the internal relativity of executive pay, particularly the gap between the chief executive's compensation and that of the broader workforce, is a significant point of inquiry, irrespective of whether Section 30B explicitly mandates its disclosure.

The second test focuses on "Variable pay that still varies," reflecting shareholder fatigue with short-term incentives that consistently pay out near target every year. Companies must justify why a budget is considered a "stretch" if the payout curve consistently hovers around it. If non-financial measures trigger payouts while financial targets are missed, board minutes must clearly document the conscious trade-off made. A concerning trend of declining safety metrics alongside increasing bonuses, for example, will be framed as a risk-governance failure rather than a "balanced scorecard" success. For long-term incentives, common shareholder battles include the use of adjusted earnings that exclude costs deliberately incurred by management, capital-efficiency hurdles that remain static, dividends being credited onto awards that already vest as shares, and the introduction of restricted stock without a corresponding reduction in quantum. Crucially, King V principles continue to expect malus and clawback provisions to be actively implemented mechanisms, not merely theoretical "shelf-ware." A defense of "the rules did not allow an adjustment" is only acceptable if the committee can demonstrate it actively considered changing those rules.

The third test, "Discretion that can be replayed," distinguishes between well-governed and poorly managed discretionary pay decisions. Boards employing sound governance principles establish the criteria for discretion *before* an event occurs (ex ante), whereas those with poor practices tend to formulate justifications *after* the final numbers are known (ex post). Maintaining a concise, one-page log detailing each discretionary adjustment—including the rationale, the alternative formulaic outcome, the shareholder experience during the same period, and confirmation that the same principle would apply if the circumstances were reversed—is vital. Investors are generally more accepting of downward discretion than upward adjustments and are quick to notice when a remuneration committee appears to exercise its "spine" only during periods of strong company performance.

The fourth and fifth tests address "New leaders and special awards." When a new executive is appointed, buy-outs for lost awards should serve as a replacement, not an additional benefit. Lost awards can be mirrored on a like-for-like basis, provided that the original time and performance conditions are preserved where they remain relevant. A joining grant that essentially replicates the annual plan but with more lenient terms will be perceived as additional compensation. If a new chief executive's pay exceeds that of their predecessor, it is imperative to clearly delineate the factors contributing to this difference, separating the demands of the role, prevailing market conditions, and the individual's specific qualifications. Conflating these elements into a single, vague explanation can transform what should be a straightforward appointment into a contentious shareholder vote. One-off awards are similarly subject to intense scrutiny.

For lawyers and compliance officers advising public and state-owned companies, meticulous preparation of remuneration policies and reports is paramount. Addressing these "five tests" comprehensively is essential to secure the necessary South Africa Companies Act remuneration policy approval and public company remuneration report approval under Sections 30A and 30B. Failure to do so carries significant governance consequences, including the potential removal of remuneration committee directors, highlighting the need for robust state-owned company executive pay governance and adherence to King V principles.

Lawyers and compliance officers advising public and state-owned companies must ensure their clients' remuneration policies and reports are meticulously prepared, addressing the 'five tests' outlined, to secure shareholder approval under Sections 30A and 30B of the Companies Act and avoid the serious governance consequences of repeated disapproval, including the removal of remuneration committee directors.

Source: Original reporting via Webber Wentzel and Institute of Directors in South Africa.