Wage Gap Myths

Income inequality continues to be a highly debated topic both within South Africa and globally, with widespread concern regarding fair and equitable pay from executives to general workers. There is a common perception of an unnecessary large gap between CEO/executive pay and general staff pay and that this gap is widening every year. It is important to explore what drives these perceptions whether they are based on fact or in fact myths.

The wage gap is defined as the ratio between the CEO pay and the general staff pay. For example if the CEO earns R100 000 per month and the general worker earns R10 000 per month then the wage gap is 10 – the CEO earns 12 times what the general worker earns. Although the definition is quite straight forward, there are a number of factors that significantly impact the reporting of the results of these measures.

Factor 1: What is the definition of general worker pay?

A wage gap is generally calculated in two different ways:

Wage gap = CEO pay / Lowest paid employee pay

OR

Wage gap = CEO pay / Median general staff pay

These reporting methods can influence the wage gap hugely in that the lowest paid worker will earn a fraction of the median of all the workers below Executive. The lowest paid worker may earn around R8 000 whist the median of all general staff workers may be R24 000  – this means that the wage gap will be 3 times as high for the first reporting method and depends on one salary that may not be representative of pay in the company.

Factor 2: Which industry is the wage gap reported in?

The mix of organisations across industries within the sample, and is another factor to consider. In labour intensive organisations/industries where there are a large number of lower level employees (Paterson A band roles), it can be expected that the wage gap would be higher than in organisations/industries that have a smaller number of these types of roles. As an example, the median pay of Paterson A, B and C band employees within the agriculture industry is expected to be significantly lower than that of a business consultancy or law firm, as there are typically more lower level employees within the agriculture industry. The consultancy’s median would be higher as there are typically fewer A band employees and more C band employees (with higher qualifications, skill sets, etc. and therefore higher pay) in their general staff sample. Similarly, employees that outsource their cleaning and maintenance services would have fewer full time A and B band staff which again could impact the median employee’s salary calculation.  The graph below shows how the range of wage gap varies depending on the industry.

Factor 3: What is the definition of Pay for the CEO?

In terms of what is meant by “pay”, a standardisation of what is used in the wage gap calculation is needed when doing any comparisons. Is the measure based on guaranteed package or does it also include incentive amounts paid? If it does include incentives paid, conclusions drawn from the results should also take into account that incentive payments assume certain performance criteria are met. Varying performance measures, incentive scheme designs, and actual performance scoring outcomes would affect the results of these wage gap analyses.

CEO pay is made up of three components, namely:

• guaranteed pay (GP)
• short term incentives (bonuses)
• long term incentives (usually share based payments).

These elements of pay are usually in the following order of magnitude 100: 75: 85.

So if the CEO earns R1 million fixed pay his total remuneration will be about R2.6 million. The net effect is that the wage gap will increase from 10 to 26 if the variable pay is included in the CEO pay (if the CEO earned R1million GP and the median staff GP was R100 000). The table below reflects national market wage gap statistics (across industries) as at March 2018 and shows the difference between the wage gaps when based on guaranteed package and when including short-term incentives.

Table 1:

Table 1 above also reflects a wide range from the lower quartile to upper quartile wage gaps. Looking at these three factors it can be seen that the wage gap could be reported at various levels depending on the salary definition used.

 Conclusion

When wage gaps are reported the underlying assumptions may not be documented transparently since there is no single formal benchmark for the wage gap – because different industries and operating models would have different results.

 

A much better way of reporting the wage gap would be to demonstrate a reducing wage gap over time – in other words a continuous improvement in the wage gap. It is important that organisations report on their own wage gap and show improvement year on year.

 

When conducting a wage gap analysis, we should therefore be cautious of simply referencing a set of results, as differences in inputs and interpretations could lead to an incorrect conclusion. In order to ensure that clearly defined income inequalities within our economy are progressively reduced, it would be logical to focus on internal improvement rather than external benchmarking.

Written by:

Trevor Nel
Survey Manager