Tuesday, September 21, 2010

LABOUR: CHANGING FOCUS.

Few things break down our immunity to the deadly economic virus of expectations more than comparisons do. The habit of comparison seems to be so deeply embedded in all of us that it often defies rational thinking. It fuels expectations and dampens aspirations. Worse still, it leads to envy, jealousy, anger and eventually violence. And by the way, it makes us terribly miserable!

It is perhaps not surprising that wealth distribution solicits far more attention and emotive debate than wealth creation does. The simple logic that you have to create wealth before you can share it is lost. But we take it a leap further into total foolishness by thinking that we can create wealth by sharing it differently, by fighting about it, by stomping on the cake. It should be of great concern to all that the economic debate in South Africa is focused virtually exclusively on wealth distribution. Sadly, it has gone beyond debate into belligerence, acrimony and combat.

In normal, even remotely market driven or “mixed” economies, there is logic to wealth distribution that resists meddling. That’s not to say it is always appropriate, just that any arbitrary meddling is dangerous. Yet we mess with it - often to the longer term detriment, if not destruction of wealth creation itself. It would also be na├»ve to assume that wealth creation and wealth distribution are not affected by external forces some out of our control and others in a deliberate attempt to manipulate outcomes for the benefit of a vested interest. What I find most amazing is the extent to which the very simple concept - understood at any level of awareness - of adding value and sharing it in a way that reinforces wealth creation, is so often and repeatedly flouted.

clip_image002This is quite a vast topic and I hope to return to the proportions in wealth distribution later. Suffice it to say these distributions are not arbitrary, depend on the nature of the business and should be informed by supply and demand. Ideally these forces in turn should be enlightened and values driven. For now let’s examine the contributors/beneficiaries separately – starting with employees.

As the Contribution account shows, employees as a group are on average the biggest single beneficiaries of measured wealth distribution. But, as I argued previously, you cannot separate measured benefit from measured contribution, because the wealth creation or valued added measurement itself reflects both. So employees are also on average the biggest measured contributors to wealth creation. But there is an important perspective. The 50% share to “employees” includes all employees on the payroll, ranging from the chief executive to the casual worker. The concept of a “working” class is a political and ideologically inflamed one which is arguably outdated and counterproductive. It is a divisive rhetoric that detracts from wealth creation.

Of course it finds fertile ground in poor leadership and inordinate pay disparities. I worked on a number of sites during my consulting years. My field of enhancing employee awareness put me in touch with the “working class” in highly interactive sessions for extended periods and often in environments of extreme union belligerence. Not once did I find any opposition to the concept of differentiated pay based on skills – not even from the most hardened labour activists. Also, the perception that top management runs away with most of the labour share is incorrect. My own research showed on average that the 5% at the top received about 15% of the share in large companies. The ratio is mostly even lower in smaller companies.

But it is common cause that pay disparities in many businesses today have long passed their tolerance levels and for questionable reasons. Executive pay has been subjected to such wide criticism that there is little need for me to add my voice to the clamour in this context and rather leave it for a separate article. The debate is rife with generalisations, inconsistencies, innuendo and inflaming assumptions ranging from Cosatu’s 1700 to 1 ratio between highest and lowest, to Pricewaterhouse Cooper’s 30 to 1. This category is muddied further by incentives and bonuses often not easy to detect. Share incentive schemes in particular distort the “labour” share of wealth creation and often hide the costs to shareholders.

What should be of concern is that the distribution of wealth is not being informed by market forces of supply and demand. In the employee share we are dealing with a severely dysfunctional market and on both ends of the spectrum. I do not find PwC’s comparisons with “global peer groups” convincing. True, some South African “executives” may be valued abroad, but this is far too narrow a market to create pay benchmarks and make “peer” comparisons valid. Just think of the havoc wreaked by a few of our top C.E.O.’s in recent years and we could argue that they would have been lucky to get a job as a packer in Sainsbury’s. But by an invalid comparison many are paid pop-star salaries even though they would not pass the elimination rounds of “Idols South Africa”. And these comparisons inform all pay structures, including parastatals, government and sometimes even local authorities.

On what are some of these “performance related” payouts based? A question raised in King III. Do they encourage longer term wealth creation or short term profiteering? The two are often diametrically opposed. The dysfunction of the labour market on the lower skills spectrum is patently obvious and I have dealt with it in a previous article. Given further interventions and interferences such as Affirmative Action, I’m not sure if we could argue that even the middle and skilled tiers of the labour share reflect real supply of experience, skills and qualifications.

Pay disparity in South Africa has encouraged comparisons and has broken down our immunity completely against the deadly expectations virus. It has created an intolerable division in a group that should be united in creating maximum wealth and prosperity in South Africa. At the very least these pay differences need to be fully divulged, explained and defended against a norm set for a particular industry or sector – a kind of company and sectoral Gini co-efficient.

There is an important feature of the employee share of wealth that shows that the powerful forces at play do not brook our silly little interventions. The Reserve Bank statistics show that this share has been relatively constant at between 50% and 60% since 1993. Yet, we have seen increases in wages and salaries over this period. Some have been supported by economic growth translating back to increased value-added at company level. But I would suspect most have not. So if the share of the pie is the same, yet most of the individuals involved have received more than the increase in the size of the pie, it can only mean a reduction in the number of individuals. Of course this is part of productivity improvement but it also shows a clear correlation between increased pay and increased unemployment – in a country rapidly heading for two classes: employed and unemployed. So much for MERG’s wage led growth theory.

My mischievous question last week needs revisiting. As biggest contributors to wealth creation, should employees not govern companies? Given the above, and the fact that executives are part of the employee share, one could argue that employees indeed do govern. But then, on whose behalf do they govern? The most common immediate response would be on behalf of owners or shareholders. If this were true, there would have been no need for Mervyn King. There may be the odd C.E.O. who would argue that they govern on behalf of staff, but most would argue that they govern on behalf of all of the stakeholders. The reality is that, as Alan Greenspan discovered, a significant number govern on behalf of themselves, unleashing another “predatory force” or internal parasite on wealth creation.

My own view is that the top brass should govern on behalf of customers with due regard to society’s needs. And the labour group at its best should focus on maximum contribution which translates into maximum added value, in turn enabling informed optimum and equitable distribution.

In this context, Cosatu’s grand restructuring may have some merits. But no-where (admittedly only in newspaper reports) have I read what labour is prepared to bring to the table. It’s all about what they expect to get. What about greater fortune sharing in exchange for greater involvement in company operations…or regular discussions on increasing wealth creation instead of strikes for different distribution? “Become the change you want to see.” – Gandhi.

Ultimate empowerment lies in what we give, not in what we get…even for a worker.

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