Private vs. public pay practices

Remuneration practices have far-reaching consequences, not only for individuals and companies but for the economy as a whole.

Employees’ personal finances for the most part, depend on their salaries. These salaries allow them to procure goods and services which stimulate the economy and ultimately form the life blood of the economy. These salaries, however, cannot simply be raised indefinitely in a bid to stimulate the economy (through increased demand), as the cost associated with these increased salaries will cause the cost of goods and services to rise (inflation). As a result, individuals would still only be able to purchase the same basket of goods as they did before, despite the increased salaries.

Employee remuneration is more often than not, the largest percentage of a company’s total expenditure. As a result, firms are highly concerned with their pay practices as they impact on their financial bottom line.

The pay practices of public (municipalities and State-owned enterprises (SoE)) and private sector firms differ significantly, particularly at the lower levels. According to salary database, Table 1 shows the pay practices of the public and private sector at each occupational level.

Table 1: Total guaranteed packages compa ratios, compared with the private sector by occupational level.

Executives have been left out of the analysis as the remuneration structure of private sector executives is heavily influenced by long-term incentives. The compa ratio of the public entities is expressed as a percentage of the private sector salaries e.g. at the A band the SoE salary is 192% of the private sector salary and the municipal salaries are 231% of the private sector salaries.

The median pay by grade at each grade has been calculated for each sector and has been expressed as a percentage of the private sector’s median total guaranteed package. The lowest occupational level (A Band) has the largest diversion in pay practices between the public and private sector.

At first glance, it may appear that the SoEs and municipalities pay these employees too much, but it must be borne in mind that the private sector’s low-pay level at this occupational level plays a significant role as well. The data would suggest that whereas the public sector seeks to pay low-level employees a liveable wage, the private sector which is profit seeking, ties pay to productivity more closely. A large contributor to this difference is that across all occupational levels, public sector employees receive larger benefits as a percentage of their basic salary (cash component of total guaranteed package).

The relatively high levels of pay enjoyed by public sector employees at the lower levels, results in there being significantly less inequality within the public sector compared with the private sector.

The Gini Coefficient and the 10 – 10 ratio are measures of income inequality. The Gini Coefficient ranges between zero and one, with zero representing absolute equality and one representing absolute inequality. The 10 – 10 ratio expresses the sum of the salaries of the highest paid 10% of employees as a ratio of the sum of the salaries earned by the lowest-earning 10% of employees. The larger this ratio, the more inequality exists. According to , Table 2 summarises these measures within each sector (A, B, C and D band staff only).

Table 2: Gini Coefficient and 10 – 10 ratio by sector

In both cases, the private sector has the most income inequality.

A large contributor to this is the low level of pay paid by the private sector at the lowest occupational level. The private sector’s profit motive and linking of pay to productivity plays a substantial role in guiding its pay practices, together with the supply of labour at each occupational level.

South Africa has an abundance of unemployed, low-skilled individuals and, as a result, these firms do not need to pay premiums to attract employees at the lower occupational levels. Although this makes sense from an economic (supply and demand) point of view, the consequence of this is that it causes increased levels of income inequality in the economy and can result in a group of ‘working poor’ at the lowest occupational level.

In contrast to the private sector, the public sector is not only profit-motivated and, as a result, does not adhere to the same pay principles as the private sector. The public sector focuses on service delivery and the welfare of its citizens. This focus on welfare extends to its employees as well and is evident in the higher levels of pay (including benefits) earned at the lowest occupational levels. Although this is a noble ideal (paying liveable wages), the tax payer is the one who ultimately provides the means to pay these salaries and, as a result, these salaries need to be reviewed regularly to ensure that they do not become excessive.

 Conclusion

The public and private sector can learn from each other, even though they seem to have differing pay practices:

• The private sector needs to avoid paying at levels which create ‘working poor’ individuals as this results in income inequality and social tension.
• Similarly, the public sector needs to be cognisant of the fact that simply paying employees at levels which are not linked to productivity is inflationary and places a larger burden on tax payers – as the remuneration of employees as a percentage of tax revenue increases.

The Holy Grail is possibly the merging of these two approaches, in which one pays employees a decent liveable wage, which is linked to productivity and benefits both the employer and employee.

Written by:

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

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