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Comparing Private and SOE Pay Practices

Bryden Morton, B.Com (Hons) Economics, Executive Director & Chris Blair, B.Sc Chem. Eng., MBA – Leadership & Sustainability, CEO

Remuneration practices have far reaching consequences, not only for individuals and companies but for the economy as a whole. The bulging public sector wage bill was mentioned on numerous occasions within the 2019 South African budget speech and has been identified as a key area of concern within the economy. 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 state owned entities and private sector firms differ significantly, particularly at the lower levels. According to 21st Century’s salary database (www.21century.co.za) , Table 1 shows the pay practices of the SOE and private sector at each 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 SOEs is expressed as a percentage of the Private Sector salaries eg: Within the A-Band the SOE salary is 205% (approximately double) of the Private Sector salary.

Table 1: SOE Total Guaranteed Package Compared to the Private Sector by Occupational Level

Band Basic Description SOE
A Unskilled / Basic Skills 205%
B Semi-Skilled Workers / Operational 172%
C Skilled Workers / Advanced Operational 145%
D Middle Management / Professionals 115%

*Source: 21st Century Database (www.21century.co.za)

The median pay by grade at each occupational level 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 SOE and private sectors. At first glance, it may appear that the state owned enterprises 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 SOEs seek 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, SOE 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 SOE employees at the lower levels, results in their being significantly less inequality within the SOE market compared to 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 21st Century’s salary database (www.21century.co.za), Table 2 summarises these measures within each sector.

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

Indicator Private Sector SOE
Gini Coefficient 0.49 0.32
10 - 10 Ratio 10.21 9.23

*Source: 21st Century Database

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 levels. 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 levels. In contrast to the private sector, 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 that 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.

The SOE 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 income inequality and social tension. Similarly, the public sector needs to be cognisant that simply paying employees at levels which are not linked to productivity is inflationary and places a larger burden on the tax payer - 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 which pays employees a decent liveable wage, which is linked to productivity and benefits both the employer and employee.

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