An analysis of the use of share-based payments by the JSE Top 100 companies

Abstract

Limited research has been conducted on companies’ use of share-based payments in a South African context. Where research has been performed, the focus has been predominantly on shared-based payments as part of executive remuneration packages. This paper extends this research by investigating all uses of share-based payments by the Johannesburg Stock Exchange’s (JSE) Top 100 companies. A content analysis was used to capture the details of each scheme disclosed by the JSE Top 100 companies. This included at whom the scheme was aimed, the purpose of the scheme, the settlement type, the vesting period and conditions, and whether there had been any modifications or cancellations.

Descriptive and inferential statistics were used to analyse the data. Results reflected that 93 of the 100 companies investigated made use of share-based payments. Seventy-four per cent of all instruments were equity-settled. The few cash-settled schemes found were primarily used by the Basic Materials and Financials sectors. The average vesting period for all instruments was approximately 4 years, with Black Economic Empowerment-aimed schemes having the longest vesting period at 10 years. Non-market performance conditions were most prevalent at 87% while only 27% included market conditions.

Overall, the findings are in line with Agency Theory and prior papers. In addition, this paper found a significant number of modifications and cancellations of instruments. This may be because of poor economic conditions, where reduced economic activity and lower share prices result in share-based payments becoming unfavourable to holders.

Keywords:

• share-based payments
• cash-settled
• equity-settled
• JSE Top 100
• IFRS 2

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Statement of Financial Accounting Standards.

2 The question arose that if a company achieves 26% Historically Disadvantaged South Africans (HDSA) ownership, and then HDSAs sell their ownership interests, does the company have a responsibility to constantly reattain the 26% ownership threshold. This issue was taken to court and settled in 2018 with a verdict that once a company is empowered, it will not have a responsibility to continuously maintain the 26% threshold (Lexology, 2020).

3 ZAR is the Republic of South Africa’s local currency.

4 This is specific to the Institute of Directors of Sothern Africa’s King IV Report on corporate governance.

5 This number was haphazardly selected knowing that if any company disclosed more share-based schemes, more columns could easily be added. If any company didn’t disclose this many schemes, those cells were left blank.

6 There are 32 companies each with 2 schemes resulting in 64 schemes.

7 Many companies had more than one SBPT. For this reason, the total number of instruments of 269 is greater than the sample of 100 companies.

8 77 Companies had a primary listing on the JSE while 23 had a secondary listing on the JSE.

9 By market capitalisation.

10 Such as a general declining macroeconomic environment and country or political risk.

11 H-statistic 5.956, df 2 and Asymp. Sig. 0.051 (2-tailed).

12 This company was the only secondary listing company with a 10-year vesting period. All other 10-year vesting period SBPT were from primary listed entities.

13 The 2010 Mining Charter required mining companies to achieve 26% ownership by HDSA. This was often achieved through Trusts and SBPT. An early issue arose that, once shares vested in HDSA's hands, if they sold those shares did the mining company have an obligation to top-up to re-attain the 26% ownership. The court found that mining companies 'once empowered [achieve 26% ownership by HDSA], always empowered'. The Minister of Mineral Resources and Energy fiercely opposed this principle. The court order is also only applicable to the 2010 Mining Charter. Clauses on mining right renewals and transfers in the 2018 Mining Charter may negate the principle of once empowered, always empowered. These clauses are being challenged via a judicial review.

14 Many large, institutional, and international investors have such significant investment needs that investing in smaller companies is impractical as it would often result in the investors owning too significant a stake (if not resulting in complete ownership). This is not ideal, and all the shares may not be available for sale. Finally, these classes of shares also typically have reduced trading volumes and liquidity making them less desirable to large investors (Amihud & Mendelson, 2000).

15 Common methods include forming Trusts or Special Purpose Vehicles that hold shares on behalf of BEE participants where the shares are paid for by the dividends declared on those shares to the Trust until the purchase price is paid up. Other methods include forming specific classes of shares for BEE participants. The JSE initiated a specific segment of the Main Board for BEE-only shares. Sasol Ltd was the first to participate in this segment in 2011 (Financial Mail, 2012).

16 Accounting students are typically taught the basics of these three valuation models, with a focus on utilising the valuation outcomes in an accounting context. The assumptions that must be satisfied before a model may be applied are not covered (SAICA, 2019, p. 129). An actuary is likely involved in the process to ensure the mathematical acceptability of the model applied.