Wage gap inflated by variable pay
PERCENTAGES: THE MORE YOU EARN THE MORE YOU GET
Alternatives to the current design principles need to be considered.
Inequality is one of the largest social ills facing not only South Africa but the global economy. The issue of equal pay across societies as well as gender and race has been discussed at length within a variety of forums.
The most prevalent worldwide issue related to equality – or the lack thereof – is the growing wage gap – the ratio of pay between the chief executive and the general workers in an organisation.
This ratio has been calculated using various methodologies, but the result is usually the same in that the gap is seen as too large.
Whether or not the ratio of pay is equitable depends on who you ask, but one must look at traditional pay design to find how this gap can become bigger and bigger over time if not controlled.
Total guaranteed package (TGP). Short-term incentives (STI). Long-term incentives (LTI).
Total guaranteed package is the value of the fixed pay an employee receives. Short-term incentives are performance driven and are designed to pay out within periods of less than a year. Long-term incentives are designed to drive performance and retain staff over the long term and typically have a vesting period (time to pay out) of between three and five years.
The design of incentive schemes has traditionally favoured those at the higher levels as percentage and eligibility are positively correlated with job grade.
The possibility of being eligible to be part of an incentive scheme, whether short-term or long-term, also increases as job grade increases.
The reason for this is that as a person moves through the ranks of an organisation, their ability to influence higher-level outcomes increases as well.
This leads to variable pay in both the short-term and longterm 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 the highest-level occupations earn the highest percentage of benefits (both STI and LTI) off of a higher value TGP.
This means the wage gap will continue to grow if performance is met in a company.
If we, as a society, are serious about reducing the wage gap and becoming more equitable in the labour market and society, perhaps we need to review our traditional remuneration package design principles.
The easy answer would be to apply a flat, standardised percentage to all employees at all occupational levels when designing their incentive schemes, but the reality is not as simple.
This would be contrary to existing pay design principles.
At the higher occupational levels, these large incentives and share schemes are often used to attract and retain scare skills – it is about supply and demand.
There is no easy answer, given the myriad of factors that influence remuneration design.
If we are truly striving for more equality in the labour market, alternatives to the current design principles need to be considered.
Bryden Morton is executive director and Chris Blair is chief executive at 21st Century
Incentive schemes favour those at the higher levels
UNEQUAL. There is no easy answer to the conundrum since incentives are generally used to attract and retain scare skills at the higher levels of employment.