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Rankin - The Higher Salaries Debate

Keith Rankin's Thursday Column
Higher Salaries
16 September 1999

The principal effects of the post-1984 economic reforms have been a reduced rate of economic growth, and a markedly greater increase in inequality. These facts are no longer questioned. The only controversies relate to the explanations.

One of the most politically sensitive features of the growth in inequality has been the huge increase in elite salaries in both the private and public sectors. What passes for public "debate" on this issue tends to be short on analysis and long on outrage.

Why do MPs get bigger percentage pay increases than ordinary workers? Why does Christine Rankin, CEO of WINZ, get paid $50,000, more than the Prime Minister's $200,000? And why does the Governor of the Reserve Bank (Don Brash) receive $500,000 per annum, more than his American equivalent (Alan Greenspan) who is arguably the most influential man in the world? And why does David Bale, supersensitive head of the 'cash cow' the Lotteries Commission, receive nearly as much as Dr Brash?

Only 15% of adult New Zealanders receive annual before-tax incomes in excess of $40,000 per annum (see my Mean Wages and Median Incomes). The difference between ordinary and elite wages is huge.

Members of Parliament (and judges) have their pay determined by the Higher Salaries Commission (HSC). Thus, when they get an above-average pay rise, they are able to say that their wages are set by an independent crown entity. The HSC is mandated to set MPs’ salaries to maintain a relativity with managerial salaries in the private sector. To what extent do MPs (or at least governments) determine the remuneration of the upper echelons of the private sector? Government policies that influence private sector salaries also influence MPs' salaries.

I do not make the claim that Labour and National governments favoured neoliberal free market policies solely as a means to maximising their pay. Nevertheless, if MPs were motivated (as the 'economic man' of economics textbooks is motivated) to maximise their incomes while minimising their workloads, the pursuit of Rogernomics and Ruthenasia would have been the most logical self-serving political strategy.

There can be little doubt that market liberalisation policies are the main cause of the high salaries in the top tier of the private sector. What is in doubt is the transmission mechanism from liberalisation to high elite private sector remuneration.

Economic theory suggests that salaries are set by supply and demand, and that people will choose to enter those professions which pay the highest salaries. In that way, markets should act to bring down the pay of the overpaid, and should act to raise the wages of the underpaid. The opposite has in fact happened.

Those who receive very high salaries claim that they do so because there is a shortage of managerial talent. Yet, if the market system was working, there would be no such shortage. Before 1985, there were fewer entry barriers to higher education and employment than there are now. Liberalisation has removed many of the activist employment policies that served to offset the huge market failure problem that leads to any undersupply of top executive talent.
Another reason cited for high private sector remuneration is globalisation. Executive talent operates in global, not national markets. This enhances the market failure problem, because any attempt to use more of our tax dollars on training and education tends to generate tax revenue for the countries that import New Zealand trained "human resources".

There’s more to the problem than global market forces, however. Many New Zealand entrepreneurs and knowledge workers would work in their own country for much lower incomes than they could get overseas, if only they could get the kind of work that they are trained to do. Further, many people from overseas would like migrate to New Zealand, even at the cost of a pay cut. There is not an undersupply problem in New Zealand.

The problem is one of culture, and of contempt for shareholders. This contempt is often a particular problem in crown entities (which includes the Reserve Bank) and state owned enterprises (SOEs), where the shareholder principals find it extremely difficult to exert their collective power over their opportunistic agents.

As a result of this culture, employees like David Bale feel enabled to ask for an excessive wage. The official representatives of the owners of crown entities – National Party political appointees in the case of the Lotteries Commission – are a particularly soft touch.

I found David Bale’s sensitivity to the matter of the publication of his salary somewhat revealing. Our chief executives do seem to understand, deep down, that they are overpaid, and that their principals or their customers are out of pocket to the extent of that overpayment. It’s not just the salary; it’s the perks, the trips to Norway and the like, that grate on a population most of whom are stuck in a poverty trap, with family incomes around 5-10% of the personal incomes of Don Brash and David Bale.

The public concern over Bale's salary was really targeted at the directors who agreed to such overpayments, and to the political system which generated the culture of the overpaid manager. It was not personal. New Zealanders actually admire the gall of persons who can pull a fast one at the expense of their principals.

We, the people of New Zealand, should have a say in the remuneration of all of the people we employ. In a functioning market economy, the employer always has that right. Further, with higher public sector salaries determined by private sector executive salaries, the public is a stakeholder in the private sector remuneration process. We therefore have a right - indeed a duty - to question excessive salaries in the private sector.

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