Pay for the average worker continues to lag way behind executive remuneration, with top management getting pay rises double that of general employees, according to research by the National Labour and Economic Development Institute (Naledi).
In a paper examining wage settlement trends in South Africa released earlier this month the institute found average wage increases for workers in 2007 averaged 7,5% in both the private and public sectors.
This contrasts starkly with increases paid to chief executives and executive directors, who got increases of 14% and 10% respectively in 2007, says the report. CEOs were paid an average salary of R6million, up from R5,3-million in 2006, while executive directors were paid R3,3-million, up from R2,9million.
Employees’ salaries rose 1% above average CPIX inflation of 6,5% for 2007, while top management saw increases of 7,5% above inflation.
Naledi senior researcher Kimani Ndungu says that massive pay packets for top management result from an unfounded belief that an expensive CEO means a company will perform well.
”There is no real correlation between the pay of executives and [a company’s] performance,” he says.
But Laurence Grubb, managing director of human resources company Mabili, says that competent executives are in short supply.
”Shareholders and companies are most often forced to agree to these increases to hold on to their successful executive team,” he says.
”A key test for any company is to find out what it would cost to replace [its] incumbents. In most cases companies have to buy in new executives at premiums on what they are paying their existing executives.”
He says the gap between the employed and unemployed in South Africa is perhaps more concerning than the country’s wage gap.
”Sometimes it may be better to pay those executives who can create jobs and assist in growing the economy well rather than lose them to other countries and end up with a shrinking economy with no job growth,” he says.
With CPIX at 10,4% and expected to rise, unions have called for nothing less than double-digit wage settleÂÂments in 2008.
Ndungu estimates that in 2008 CPIX will average 8,5% or more and that, should unions get their way, average wage settlements could fall between 10% and 12%.
Grubb says that executive wage settlements tend to remain at least 2% above those of workers. With this in mind, he says, it is ”probably not too far off” to forecast executive increases of 12% to 14%.
Lindie Engelbrecht, chief executive of the Institute of Directors in Southern Africa, says this trend is unlikely to slow down, nor does she believe it should, given the global skills crunch.
She argues that corporates should pay for good performance, however. ”The question should be less about the percentage movement up, but rather that the value received is commensurate with the increase,” she says.
”In many entities that would be true, but unfortunately many entities are just applying across-the-board increases of [for example] 10% without understanding the concepts of pay for performance.”
Massive wage hikes could put further pressure on the country’s inflationary outlook. Economist Mike Schussler says that wages are lagging indicators of inflation and while they rise in line with inflation, they also contribute to keeping it higher for longer. He says the effects of wage increases take time to take hold but once felt contribute to businesses increasing prices.
Ndungu counters that the chief contributors to inflation are oil and food prices and says ”wages’ contribution to inflation is so small” that they cannot be so easily blamed.
Ndungu says that the trend of wage increases parallelling inflation is a ”function of practice” and that ”employers and unions have not explored new strategies to increase workers’ wages above inflation”.
