The wage gap headache

PAY COMMITTEES MUST HARDEN: BRAVE AND SOCIALLY MINDED PIONEERS A HOPE

The (global) increasing wage gap is particularly concerning in SA due to our high income inequality and unemployment levels. CEO pay cheques are swelling at an alarming rate, so the wage gap’s rising. Brave, socially-minded pioneers are the only hope to arrest the wage gap before we could experience an “Arab Spring” on pay. The wage gap is the ratio between CEO pay and the general staff pay.

CEO pay is complex as it includes all three elements of pay: total guaranteed package, short-term incentives (including commission) and long-term incentives.

The guaranteed portion of pay is as reward for work done. Short-term incentives seek to link pay to performance. They’re typically paid for a period less than a year.

Long-term incentives are usually paid as equity and seek to tie executives’ and senior management’s performance to longterm goals (over three years).

In SA, it’s common practice for the total guaranteed package to be adjusted each year. Over the last five years, the CEO and executive pay percentage increase has increased less than general staff pay. So annual increases of total guaranteed packages aren’t the main source of the increasing wage gap.

Short-term incentives are generally part of executive pay packages and often available to lower levels of staff. But, as there’s more short-term incentives at executive level, it’s a potential source of increasing the wage gap. Another lies in how shortterm incentive schemes are designed. If the prevalence of short-term incentives and percentage of guaranteed package paid out by these schemes is increasing as occupational level increases, it could increase the wage gap.

Long-term incentives are typically only offered to senior management and executives, so they often have an income stream not available to lower occupational levels. Long-term incentives are also linked to the total guaranteed package, so higher job levels receive greater allocations. This exacerbates the wage gap problem.

As such, the public often becomes disgruntled when these incentives are paid out to executives when a company hasn’t performed well.

Bryden Morton is data manager and Chris Blair CEO at 21 Century.