Question of the wage gap

THE CORE: MOST PREVALENT EQUALITY ISSUE

The wage gap increases dramatically as short-term and long-term incentives are added in.

The most prevalent worldwide equality issue is the growing wage gap – the ratio of pay between an organisation’s CEO and general workers. One must look at traditional pay design to find how this gap can become larger over time if not controlled.

Three elements of pay typically make up traditional pay design:

Total guaranteed package (TGP) – the value of fixed pay an employee receives;

Short-term incentives (STI) – performance-driven, pay out within periods less than a year; and

Long-term incentives ( LTI) – designed to drive performance and retain staff over the long term; typically have a three- to fiveyear vesting period (time to pay out).

Traditionally, an STI and LTI scheme design has favoured an organisation’s higher levels, as the percentage of package and eligibility positively correlate with job grade.

Graph (top)

Shows a typical remuneration mix design when using guaranteed pay as a base of 100 and expressing STI and LTI as percentage of TGP.

Table (top right)

Shows how employees move up through occupational levels, the percentage of TGP that can be earned through incentives increases, too.

The possibility of being eligible to be part of an incentive scheme (both STI and LTI) also increases with job grade, because as one moves through an organisation’s ranks, the ability to influence higher-level outcomes increases. And this leads to variable pay in both the short- and long-term often being used to incentivise performance.

TGP also shares a positive correlation with occupational level. This ultimately has an inflationary effect on the overall wage gap, as highest-level occupations earn the highest percentage of benefits off a higher-value TGP.

Table (above)

Illustrates how the wage gap increases dramatically as the STI and LTI get added in. This shows that if the principles of traditional remuneration design are followed (and all performance conditions met), the wage gap increases significantly as a result of variable pay percentages at each occupational level.

This is in spite of the STI and LTI being applied uniformly. This means the wage gap will continue to grow if performance is met in a company.

According to the Central Intelligence Agency World Factbook, South Africa has the second highest Gini Coefficient Index in the world – 62.5. The index is a measure between zero (perfect equality) and 100 (one person owns all income).

If we, as a society, are serious about reducing the wage gap, perhaps we need to review our traditional remuneration package design principles.

Bryden Morton is an executive director and Chris Blair the CEO of 21st Century