Is Variable Pay Guilty of Inflating the Wage Gap?

The most prevalent issue of inequality in the workplace is the growing wage gap – this is the ratio of pay between the CEO and the general workers in an organisation.

Three elements of pay typically make up traditional pay design.

  • Total Guaranteed Package (TGP)
  • Short Term Incentives (STI)
  • Long Term Incentives ( LTI)

TGP is the value of the fixed pay an employee receives while short and long term incentives are the variable portion of pay. Traditionally, the design of an STI and LTI scheme have favoured the higher levels in the organisation as both the percentage of package and eligibility are positively correlated with job grade.

The graph below illustrates a typical remuneration mix design when using Guaranteed Pay as a base of 100 and expressing STI and LTI as percentage of TGP.

wage gap

The graph above shows how as employees move up through the occupational levels, the percentage of TGP that can be earned in the form of incentives increases as well. The possibility of being eligible to be part of an incentive scheme also increases as job grade increases. 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.

The table below illustrates a theoretical calculation of each general staff band’s first sub grade wage gap to the highest grade (F Upper)  when typical variable pay design percentages are applied to all staff.

wage gap

This table illustrates how the wage gap increases dramatically as the STI and LTI get added in, eg. at B1 it moves from 28.99 to almost double at 57.49.

The South African example may be startling, but similar patterns are seen around the world, albeit at varying degrees.

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? If we are truly striving to more equality in the labour market, alternatives to the current design principles need to be considered.

Written by:

Bryden Morton
Data Manager B.Com (Hons) Economics
[email protected]

Chris Blair
CEO B.Sc Chem. Eng., MBA – Leadership & Sustainability
[email protected]