14 May 2021

Finance expert suggests redistribution of public sector CEO salaries

From Checkpoint, 5:20 pm on 14 May 2021

A 'Robin Hood'-style policy, redistributing the big salaries of public service chief executives to lower paid workers, would be more effective than the government-ordered pay freeze, according to a leading business academic.

The directive, which essentially means those in the public sector earning more than $60,000 will only get a pay rise in exceptional circumstances for the next three years, has infuriated some workers.

It has prompted crisis meetings between the government and unions, and a commitment to review the directive next year.

The government denies it is a 'freeze', saying people can still move between pay bands and it is about equity, raising the wages of workers making $50,000 or less – that is 25 percent of public servants.

Some public sector leadership salaries:

  • Matt Whineray, CEO NZ Super Fund: $929,000 (after Covid-19 reduction)

  • Scott Pickering, CEO ACC: $826,000

  • Ailsa Claire, CEO ADHB: $677,000

  • John Ryan, Auditor General: $670,000

  • Peter Hughes, Public Service Commissioner: $630,000

  • Rob Everett, CEO Financial Services Authority (just resigned): $623,000

  • Cherly de la Rey, VC University of Canterbury: $594,000

  • Tim Fowler, CEO Tertiary Education Commission: $560,000

  • Judge Peter Boshier, Chief Ombudsman: $456,000

  • Sid Miller, CEO Earthquake Commission: $437,000

A lower public sector staff salary:

  • Jane Doe, administrator Dept of Corrections: $45,000

University of Otago Department of Accountancy and Finance associate professor Dr Helen Roberts put those remuneration packages into perspective.

"I just looked at the data that's out on the public sector websites, you can go and look yourself. I looked at the top five paid individuals in the state sector who were full term," she said.

"The top five earn $3.882 million between them. If we break that down, we're talking on average, those five individuals took home $776,400 each before tax last year.

"And if I think about minimum wage, that person is taking home under $40,000 a year and at the new minimum wage which just came into effect, that's $41,600.

"If we look at NZ stats, we're still talking about people earning around on average $67,000 or a median of $56,000. So there's a big difference...

"If you just want to pay [chief executives] based on what the consultant tells you, what a person in that position on average is getting paid in that sector, then that's what the Labour Act will do.

"It will tell you the minimum criteria that an employer needs to make.

"I would argue that your baseline employees are worth a lot more than that, and those top-end employees would do just as good a job, but for less money, because they appreciate what they're doing and they have skills and value that they want to add to the organisation, that has more value than just the dollar pay cheque they take home."

There did have to be some incentive to take such leadership positions, but the question was what was acceptable, Roberts said.

"Does it need to be more than half a million dollars a year? Where's the cut-off? Where's an acceptable reward for the amount of responsibility and the skills you need to do these jobs?

"They are highly skilled jobs. At the same time, you still need your face to face, customer engagement with those people who are working on the ground level.

"I think often what happens here is compensation consultants are used to help direct the board around how these pay levels should be set and the  comparison is to look at someone who's working in the private sector. 

"So someone who's in a publicly listed company, employed privately. What do they get paid, and then that becomes a benchmark for our state services sector.

"But of course there's a big difference in those roles because of the risk involved.

"In the state sector you're getting money from the government, you're not facing the risk of bankruptcy or changes in markets or changes in demand.

"You're not going to have to make a whole lot of people redundant tomorrow, so it's a very different role that you play in the state sector as opposed to a private sector individual. 

"So we can't directly compare those pay levels, and I think that's where we're seeing these very high state sector pay levels coming from. 

"We have to incentivise those individuals so that they manage those risks and the best interests of the stakeholders that they represent. However, there are still flaws in the way the pay setting process currently works in New Zealand, and in a lot of Western countries, and that is because most of these pay packets are on fixed base level.

"So when we look at the highest paid individuals, more than half of that money is paid to them in a fixed contract. It's a salary. Then there's a small amount, maybe another $100,000, $200,000 that comes with their performance incentives, but most of it is fixed.

"So there is no incentive to do more than you have to… but you're going to take away $500,000 regardless."

A bigger percentage of public sector leaders' pay packages should be performance-based, she said.

"There should be more linked to performance and less fixed pay, and if you perform well, you meet the objectives of the organisation and the criteria set out in your contract, then you should be rewarded for that achievement."

'Most of us would be happy winning Lotto once'

As idealistic as it sounded, redistributing money from leaders' salaries to boost those at the bottom of the scale was a possible solution, Roberts said.

"I often think to myself, how many times in your life do you need to earn $1,000,000? Most of us would be happy winning Lotto once.

"But in the reality of what we're seeing there's a growing gap between the people who have a lot, a whole lot, and the people that barely manage to exist, to pay rent, pay electricity, feed their children, and do essential things.

"One way around that is to redistribute that wealth.

"So the people who are earning a whole lot, they take some of their pay package and say, 'let's redistribute that across the lowest-paid employees in our company and bring them up so they're at living wage or above that'.

"And that changes the whole culture of the organisation, the respect of individuals within the organisation for each other, and it helps to build a culture where everyone is working for the same goals because everyone is being respected for what they do."

The government needed to start discussing such an idea, Roberts said.

"The model has already been used in many different places. It's been very successful.

"This is a chance now for us to make a change that can see everybody have a fair income and then spend that money in our economy and grow our GDP."

However, she did not imagine high salaries would be given up easily.

"But I think it's time we started that conversation. Think about rather than just raising minimum wage levels all the time, what is a better way for organisations to remunerate individuals in a transparent way, that grows a culture of respect and a common goal towards adding value for stakeholders?

"Long-term redistribution has benefits that will far outweigh a pay freeze. A pay freeze makes people angry. It makes people feel like they're not getting rewarded fairly.

"Redistribution simply means that people who are at the top were already well remunerated and have accumulated a lot of wealth, stop and go: 'I don't need any more money. I would like to see the money that's currently being paid to me, apportioned in a way that allows some people who are lower paid in the organisation to gradually improve their take home pay packet'."