THE BLOG

Wage Wars Reveal The Truth About Our Economic Legacy

Paying people what is fair and right is ultimately good for business. An additional rand earned by member of the working poor is more likely to be spent in the economy than that earned by a CEO equivalent.

15/12/2016 04:58 SAST | Updated 15/12/2016 09:51 SAST
Ihsaan Haffejee/REUTERS
Miners from Marikana, their families and supporters march to the Union Buildings in Pretoria, to protest against the government's lack of funding for the Marikana commission of inquiry September 12, 2013.

Wages are naturally an extremely sensitive yet unavoidable part of our everyday lives. In South Africa, they accurately tell a story of the country's parallel universes, authored by a period of relentless colonialism and published by the brutal apartheid regime which followed. This extreme conditioning period, stretching well over a century has resulted in the situation the country finds itself today.

Anchoring is a powerful psychological tool. It occurs when individuals use an initial piece of information to make subsequent judgments or decisions. In a South African context, it is that CEOs deserve what they get through the value they add, whereas members of the working poor are fortunate receive what they do as they do not add much value anyway. So here we are as a nation, successfully compartmentalising the discussions about minimum wage and executive pay. As if separating them on a set of financial statements changes the nature of what the remuneration is.

On the one hand, we criticise what appears to be commonly accepted as a ridiculously low minimum wage. A proposed minimum wage of R20 (approximately $1.5) an hour (or R3,500 a month) would struggle to support a family of two, let alone the scores of people breadwinners support in South Africa. The analysis further develops to assessing the minimum wage's impact on job creation (or losses, as the case may be). Not to forget its effects on the new colonial master named foreign direct investment (FDI). After much fanfare and folly, we predictably retreat to the monotony of our everyday lives, until the next instalment of eyebrow-raising headlines hits the front pages of the media we choose to consume. This time, executive pay enters the fray.

Bloomberg created an uncomfortable scene in South African corporate circles a few weeks back when it published its Global CEO Pay Index. It duly reported that South Africa is 7th on the list in terms of CEO pay. The country is sorely out of place and only surpassed by 6 Organisation for Economic Co-operation and Development (OECD) countries. Naturally, when they compared CEO pay to gross domestic product per person ("GDP per capita"), our beloved country was unmatched. This effectively measures what CEOs receive relative to the society where their companies are listed.

Some affected fraternities have conveniently pointed out that for the above analysis, executive pay included un-accrued long-term incentives, such as shares or share options which had not vested yet. Even though (based on current and likely performance) they are will receive these, at the current moment they do not have unrestricted ownership and thus cannot realise value from them. These shares and share-like instruments can often comprise a significant part of a CEO's total pay, as shown in the 21st Century's Executive Pay Barometer.

Unfortunately for a country such as ours, this revelation hardly changes the narrative of a huge disparity between the haves and the have-nots. The powerful and the disenfranchised. The concerned and the desperate.

In order to have the conversation about remuneration in any legitimate way, cognisance needs to be given to both economic and ethical considerations. For both these aspects, context is absolutely key. According to most credible sources, South Africa ranks among the most unequal societies in the world. This is based on the Gini coefficient, a measure of inequality of a distribution as it pertains to income. This revelation further exacerbates the implications of Bloomberg's comparison, as GDP per capita is more unequally divided than the averaged out number will suggest. In order for us to sustainably solve for a solution, an uncomfortable introspection has to be a condition precedent. This exercise begins with us wrestling with of our aforementioned anchored beliefs.

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Whitey Basson

Recent headlines involving Shoprite CEO Whitey Basson's bonus represent the latest peek into the underbelly of South Africa's economic construct. Although the names change, the argument remains the same. "CEOs possess a critical skill that is in high demand and but in short supply", they say. This argument is often coupled with references to the observed performance indicators of these companies over the medium to long term, which are then credited to the effective stewardship of its CEOs. These are the seemingly necessary ingredients for overpriced salaries according to conventional economics with a dash of colonial imperialism.

Lack of competition brings into question the apparent skills of these CEOs. In a highly concentrated market, barriers for new companies wishing to enter the market are unnecessarily high, which often results in higher profits for existing companies in the market, without a commensurate increase in value for the consumer.

For a second, consider the context in which these businesses operate. The South African business landscape is extremely concentrated. Our developmental path has been (and to a large extent, still is) characterised by two distinct economies and mirrored societies. This is why it is often very difficult to economically classify South Africa; its first world characteristics often mask the reality of the country's developmental state. If one never left Sandton, one can be forgiven for thinking South Africa has an integrated, highly developed and vibrantly competitive economy. Unfortunately, the truth is that the country's economic landscape is tilted toward big business. In the most prominent and politicised industries being mining, agriculture, retail, banking, telecoms and construction, there are four or five major companies that dictate the play.

This lack of competition brings into question the apparent skills of these CEOs. In a highly concentrated market, barriers for new companies wishing to enter the market are unnecessarily high, which often results in higher profits for existing companies in the market, without a commensurate increase in value for the consumer. This is because big businesses do not have to do much to stay in business and continue to make the profits they make. I believe this to be clearly evident in this country, as can be seen with the flurry of competition commission investigations and outcomes over our brief democratic history. Social media is the latest platform consumers have taken to in voicing their grievances about market abuses such as high bank charges, data costs etc.

Paying people what is fair and right is ultimately good for business. An additional rand earned by member of the working poor is more likely to be spent in the economy than that earned by a CEO equivalent.

The skill deserving of a high salary should be the skill of offering a consumer, who has ample choice, enough value to justify the prices charged for the company's products or services. When companies earn super-profits based on choice-limiting market constructs as opposed to genuine value driven by innovation, then the abilities of the CEO aren't as critical as prevailing consensus would have you believe.

Secondly, the market concentration in these industries stifles competition and thus job creation, as most new jobs in any economy are created by small to medium enterprises (SMMEs). Current status quo results in increases in listed company profits and share prices, even though the underlying economic fundamentals are frail. Meanwhile, SMMEs find it nigh impossible to enter and effectively compete, due to the significant market power created by the oligopolistic construct of these industries. This is notwithstanding all the policy incentives government has introduced to encourage new market entrants. With 27,1% unemployment (at the time of writing) on a conservative measure, one wonders how this is not a top priority for society as a whole.

Paying people what is fair and right is ultimately good for business. An additional rand earned by member of the working poor is more likely to be spent in the economy than that earned by a CEO equivalent. This is because their propensity to save is significantly less than their wealthier counterparts', as there are more basic expenditures they often go without. The effect on GDP is then multiplied further as that Rand continues to circulate in the economy. In addition to sound business economics, sustainable socio-economics should also be a critical consideration for every business operating in this country. Every individual gainfully employed should be able to at least survive in the society that employs them. As soon as this is not the case, anarchy is the only logical result.

I can openly admit to having no clue what the minimum wage should be. Neither do I know how much CEO's should be earning. What I do know, given the context of our history, is that reaching a place of understanding on these issues is the starting point for deeper and more meaningful reconciliation. It is only when we stop leaving it up to politicians and realise that our destinies are inextricably linked, that we can begin to build a future economic legacy that we can one day look back on with pride.