Wage gap in­flated by vari­able pay

PER­CENT­AGES: THE MORE YOU EARN THE MORE YOU GET

The Citizen (KZN) - - Business - Bry­den Mor­ton and Chris Blair Three el­e­ments typ­i­cally make up tra­di­tional pay de­sign: In­cen­tives: How much, and for whom

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

Pic­ture: Shut­ter­stock

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.

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