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UC Researcher Looks Into Local Authority Empire Building

UC Researcher Looks Into Local Authority Empire Building

April 12, 2013

New Zealand local authority chief executives are paid for empire building and, more worryingly, this is symptomatic of a wider problem in the public sector, a University of Canterbury (UC) economist says.

A new study by UC finance professor Glenn Boyle and former UC student Scott Rademaker found councils which collect the most revenue per ratepayer pay their chief executives the most.

``While this could indicate that chief executives with more revenue to manage have more complex jobs, and hence deserve to be paid more, it turns out that the additional revenue is primarily used to employ additional council personnel,’’ Professor Boyle says.

``The more bureaucrats a council chief executive is able to employ, relative to the size of their ratepayer base, the greater the remuneration he or she is able to extract on average. Chief executives who have increased personnel costs the most during the 2005-10 period have, on average, received the biggest pay rises during that time. In short, council chief executives are being rewarded for good old-fashioned empire building.

``The interesting thing about this is that it confirms a long and widely-held suspicion about the remuneration of senior bureaucrats. There’s fairly extensive management literature that sticks to the traditional view of bureaucrats as public-spirited individuals who are uninterested in money. But economists, and the wider public, have always been a bit more cynical. Previously there was no concrete evidence for the latter view. Now there is,’’ Professor Boyle says.

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However, the UC study has found that the direct effects are fairly small. On average, every 10 percent extra per ratepayer spent on council personnel yields 1.2 percent more pay for the chief executive. For the typical chief executive, this means that approximately 5 percent, or $11000, can be attributed to empire building rewards.

``But while these direct effects are fairly small, the more worrying thing is that they’re just another manifestation of a potentially much bigger problem. In Christchurch we’re seeing the local council expanding into construction, an industry in which governments worldwide have no natural advantage, a poor record of achievement, and the potential for corruption.

``The Christchurch council also refuses to sell any of its asset portfolio in order to help pay for quake recovery. The so-called economic arguments don’t withstand a moment’s scrutiny, so why the reluctance on the part of people who must surely know better?

``Our study doesn’t address this issue directly, but it does suggest a possible reason that selling assets would reduce the size of key players’ empires and so would substantially diminish both their earnings potential and their powers of patronage.”

Professor Boyle presented the results of the study at the Financial Markets and Corporate Governance Conference, held in Wellington.

Photos: Professor Glenn Boyle


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