What Kenya's top managers earn

What did the bosses of the top 30 or so blue chip companies quoted on the Nairobi Stock Exchange earn in 2009? And how did their shareholders fare in one of the toughest years of the past decade?

An analysis compiled by The EastAfrican, a sister publication of Daily Nation found that, though some of the bosses took a haircut as their bonuses were chopped in the wake of declining profitability in the depths of the global financial crisis, most corporate chieftains and their top managers did very well.

This was particularly so when compared with the general pay levels of management teams in 2007, a boom year for Kenya before the global economic crisis gathered pace in the second half of 2008.

Safaricom’s team of senior corporate officers serving on the board of directors earned between them a total of Sh310.7 million ($3.9 million) in the financial year ended March 31, 2010, in total salaries and other performance related incentives.

This team, comprising chief executive officer Michael Joseph, chief financial officer Christopher Tiffin and chief investment officer Les Baillie, earned Sh113 million ($1.4 million) in the same period in 2009.

Safaricom’s senior management team, meaning the very senior level employees who run the company but do not necessarily sit on the board, earned Sh522 million ($6.52 million), up from Sh438 million ($5.47 million).

This increase could reflect many factors, ranging from an increase in head count at the top to pay increases and bonus payments or both.

Safaricom had a roaring year, hitting Sh84 billion ($1.05 billion) in revenues — an increase of 16 per cent — and Sh21 billion ($263 million) in net profit — an increase of 27 per cent.

The bosses at Equity Bank, a firm whose growth over the past two decades has been gravity defying, also enjoyed a hefty payout.

The total pay for executive directors who serve in the board — in the bank’s case, there is only one, CEO James Mwangi — stood at Sh299 million ($3.73 million) for the financial year ended 2009, up from Sh174 million ($2.17 million) in 2008.

Total pay to Equity’s key management stood at Sh197 million ($2.5 million), which brings total pay to the firm’s top management, including directors, to Sh496 million ($6.2 million).

Mr Mwangi maintains that Equity’s definition of executive directors — which is contrary to the Companies Act and general industry practice — is everyone the firm has given the title of director, even if they do not serve on the board of directors.

The law and accounting standards requires the management to clearly state the pay of non-executive directors and executive members of a firm’s board.

Accounting conventions call for executive and non-executive board member pay be clearly delineated from that of key management not serving in the board. This is the disclosure policy most NSE-listed firms follow.

Going by this logic and simple averages, each of its executive director would have taken home roughly Sh2 million ($25,000) a month (Sh24 million or $300,000 annually) if we go by Sh299 million ($3.74 million) paid to executive directors, or the Sh3.2 million ($40,000) a month (Sh38.4 million or $480,000 annually) paid globally if we toss in key management pay — assuming everyone earns the same, which of course is unlikely.

This makes Equity’s the most highly rewarded retail banking team in the sector — both in salary, bonuses and stock options — and could explain why the bank fired a large number of these people this year to contain costs.

At EABL, two executive directors who included CEO Seni Adetu, retiring CEO Gerald Mahinda and CFO Peter Ndegwa and Diageo Africa CEO Nick Blazquez, jointly earned Sh221 million ($2.8 million), while key management earned Sh421 million ($5.3 million).

Other top earning teams include: Access Kenya brothers Jonathan and David Somen, who between them took home Sh51 million ($637,500), Athi River Mining CEO Pradeep Paunrana and deputy CEO SL Bhatia, who took home Sh99 million ($1.25 million), and KCB’s CEO Martin Oduor-Otieno and his deputy Sam Kimani, who earned Sh68 million ($850,000).

Evans Kidero of Mumias Sugar earned Sh55 million ($687,500).

A good number of CEOs earned in the Sh2 million to Sh3 million ($25,000-375,000) range, which confirms the range reported by PricewaterhouseCoopers in its biennial survey of 2009.

What does all this mean for investors and why should they care?

For investors who held or bought shares in the 2005 boom year, and have held them to date, the performance of equity in general has not been great.

This is in spite of the fact that annualised revenue growth over the past three years has been robust even in hard times, and profits have held up, though brutally down in some companies.

The holding period return, a closely watched investment performance measure, for investors who have held shares in these companies since 2005 is three per cent, and since 2007 is six per cent.

The holding period return, also known as shareholder return, measures changes in the market capitalisation over a period an investor has held a share, and factors in dividends that have been paid out.

When you factor in the high inflation that has been prevalent over the period because of rising energy, commodity and food costs, Kenyan equities have been an underperforming asset class.

With all these companies paying over $1.1 billion to investors cumulatively since 2005, the drop in share prices that followed the stock market meltdowns across the world in 2008, dividend was a significant contributor to the few positive equity returns.

Our analysis for the first time scrutinises the annual reports sent out to shareholders of listed firms every year to compile a fair picture of what chief executives, finance directors, key management of various firms and non-executive directors are earning from the firms they run.

It captures an incomplete, but useful snapshot of the state of the executive pay market at the top as Kenyan companies grapple with the contradictions between the minimum disclosure threshold required under the Companies Act of 1948, a colonial legacy, and the modern international financial reporting standards (IFRS) set by the International Accounting Standards Board, which Kenya recognises.

These standards are calling for more and better disclosure standards in executive pay as a tool to help investors and the community monitor governance standards at listed firms.

Though it is easy to paint top executives with one dark brush when one tries to link pay to performance of these companies on the NSE, this can be a misleading measure, at times.

First, Kenya’s stock market suffers a key weakness common with emerging frontier markets — it is shallow, with a limited float of shares in the market, given that a majority are held by multinational parent companies, and they also tend to be illiquid.

Investors watch the share price because it is a good rough proxy of how the general market values the future prospects of a firm.

In terms of return on equity (measured by earnings before tax divided by ordinary capital, capital reserves and retained earnings), Kenyan firms were looking good in 2009.

This is on the account of rising profitability, which is getting better, and low levels of capitalisation for most firms, which boosts returns.

Return on equity can however give a distorted picture if you compare firms with differing capital structures.