Monday, June 25, 2012

Do public servants deserve an 8% pay hike?

They could argue for even more under flexible pay linked to national wealth creation.

No doubt the headline itself has some readers’ blood boiling. Equally disturbing is the current impasse (yet again!) in pay talks between government and public servants. Most of us still have disturbing memories of the highly disruptive and damaging 2010 government employee strike.

At the time of writing the current wage negotiations were deadlocked at a similar margin as in 2010 -- a 6.5% offer and an 8% demand. Yet so far, there’s been little indication of a repeat of those events. Some may feel a bit more secure after the constitutional court ruling that Unions are accountable for damage incurred during a strike action and the placating remarks by the new Minister of Public Service, Lindiwe Sisulu.

It’s perhaps a utopian thought, but still a valid ideal to remove disputes from society that are disruptive and economically destructive. Pay disputes must rank very high as one of those, particularly in South Africa where there are relatively few curbs on Union hostility and strike action unruliness.

The only sure way to remove or reduce wages as a recurring and destructive bone of contention from our industrial and public service arena is through flexible pay. It comes in many forms and has many different features to include transparent and negotiated links to improved productivity such as in Germany; decentralised bargaining; bonuses linked to unit production; gain sharing; profit sharing and (my favourite) fortune sharing. Apart from curbing damaging strikes, flexible pay in virtually any form dramatically increases competitiveness and productivity – as reflected in a graph in Ryk van Niekerk’s recent Moneyweb article quoting an IMF study.

It is relatively easy to introduce flexible pay in companies where all tangible value is ultimately determined by the customer in free, fair and legitimate transaction. This value (or wealth) is created on the simple supposition that supply has served demand. It is in the creation of this value that rewards are generated for the contributors: labour, capital and state. It is also this value that for the largest part makes up the combined wealth of the nation that is measured in GDP, or Gross Domestic product.

The problem in introducing flexible pay for the public service is that governments mostly do not create wealth. Their primary function is to create the conditions for others to create wealth. Their secondary function is to ensure some balance in wealth distribution through social services. But it is important to note that you can’t do the latter without having done the former – you cannot distribute wealth that has not been created. You can’t get eggs from a dead goose. This requires a fine balance between the two functions and it can be argued that we have already lost the balance.

The real problem in structuring flexible pay for civil servants is that in the absence of pure user- pays and competitive principles for all departments and services one no longer has a legitimate transaction that can accurately be measured as tangible value. There are many other devils in the detail and to explore them all will require many more words than feasible for this article. So let’s stick to some broad postulates and requirements.

- The current inflation link is not useful. While the government will argue that it covers living cost increases, unions will argue that CPI does not truly reflect real living cost pressures. Also, it is more fundamentally flawed in that it focuses on what employees need and want, rather than what they deserve or have earned.

- An increase in Revenue may appear more valid but it is not always directly related to employee efforts. Also it creates the false premise that to get more, civil servants simply have to put pressure on government to increase revenue collection.

- Productivity related pay and service delivery models in various departments are clearly useful in improving service outcomes, but they cannot be directly linked to the broad and measurable ultimate value to taxpayers.

- If government’s primary role is to facilitate wealth creation then this will be reflected ultimately in GDP. Economic growth (positive or negative) offers the only useful link to public service pay levels.

Much work may still be needed to refine GDP movements as a guide to public service pay. A rough calculation of a pay increase based on economic growth could validate the union demand for 8% indeed perhaps even 9%. This is roughly calculated on 3% economic growth + 6% GDP deflator, which is an adjustment for inflation. The actual calculations should be based on the optimum government share of the nominal Rand value of GDP year on year.

But then:

- This would become a flexible portion of the pay packet, which means that if GDP growth is say negative next year and inflation lower, they could face a cut in salaries. The fact that growth is influenced by many factors simply reflects a reality that all have to pay for or benefit from.

- The share of government in GDP has to be optimum. This does not always mean less but government activities have to be lean, mean, effective, efficient and incorruptible.

- The share of public service salaries as part of overall government operating expenditure has to be disciplined and tightly controlled.

- The different levels of differentiated pay in the public service have to be rational and logical to reflect shortages of skills and professional expertise. It is simply inconceivable that some public servants are paid up to 40% more than for similar jobs in the private sector. They have a much higher level of job security and the facilitators of wealth creation should not be paid more than the wealth creators themselves.

- The unholy alliance between the country’s biggest trade union (Cosatu) and government through the ruling party has to be broken.

The current perceived advantage for civil servants of lengthy wage negotiations annually and the occasional violent marches in streets is a very short sighted one.

We have to move away from it in a volatile world where nothing can be guaranteed.

Tuesday, June 19, 2012

Stopping the madness.

Restoring trust and clearing the fog around executive pay.

We trust another human being or institution on a very simple principle: whether we believe that person or institution genuinely has our interest at heart. This trust can be promoted only marginally by spin, branding or advertising. Indeed, these efforts can be risky and counter-productive in creating expectations that ultimately are not met. The real test in demonstrating whether these people or institutions have our interest at heart is the way they behave.

The annual survey released by the Reputation Institute shows that “South Africa is losing faith in its business bosses”: to quote a Business Report headline. Only one of the country’s 20 largest firms has emerged with a “strong and robust” reputation.

When research shows that globally trust in business is at an all-time low (50% of informed people do not trust business to do the right thing) then we have to ask ourselves whether an intolerable and dangerous rupture has not happened in society. When we add the very low trust in government (less than 45% trust governments to do the right thing) then by and large we have a global population that has lost faith in its most important institutions. The social effects cannot be understated. They impact on attitudes, scepticism, productivity, domestic harmony, family relations, crime and lawlessness and promote increasing popular activism, sometimes leading to violent uprisings such as the Arab spring.

The issue around executive remuneration and the intolerable income disparities world-wide cannot be ignored as a contributor to the rift in society and the breakdown in trust in business, particularly corporate business, reflected in movements such as Occupy Wall Street. Mike Schussler’s latest research showing that lower skilled work in South Africa is overpaid compared with higher skilled work may resonate well with most reasonably informed people. But he himself in a later Moneyweb podcast interview conceded that the 6-1 skilled to unskilled ratio had to exclude executive remuneration.

But can we? When the ratio there often exceeds 300-1, and is widely reported in the media. It must be extremely difficult for any company bargaining unit to counter belligerent union demands when they are confronted with this argument, especially when there is little credible scientific market evidence to support these pay levels and they are generally defended by sweetheart remuneration committees or consultants, all of whom either have a vested interest or link in kowtowing to the beneficiaries.

Recent reports have highlighted another serious concern – the degree to which company boards have not been able to coherently justify executive remuneration decisions. Not only have they been caught flatfooted by questions from shareholder activist Theo Botha, but some major institutional investors such as the Public Investment Corporation have voted against the decisions.

All of this could be dismissed as growing pains in corporate governance and demonstrations of sound shareholder democracy. But we should not lightly dismiss the fact that we are talking about millions of Rand going to an individual and that ultimately for the most part either customers or other employees will foot this bill. The argument that shareholders settle the account ignores the additional pressure to increase profits to maintain earnings after diluting the shares. A vague “what” and “why” around executive pay is simply unacceptable in today’s social environment. It is also a moot point whether the root of the problem will be addressed by simply penalising executive pay through taxation, or by major shareholders such as Trade Union pension funds and the P.I.C. rejecting executive incentives. The latter has been suggested by journalist Ann Crotty who is probably the country’s most prolific writer on the subject.

The most important issue of all in executive pay is the criteria being used in their determination. There is little doubt that the most weight is given to shareholder value, which in turn mostly translates into short term profit maximisation, exacerbating the economic woes of the past three decades. Only a handful of very enlightened boards have made the wider stakeholder approach the predominant weighting in remuneration criteria. In most cases this approach is either ignored or forms the lesser part of the pay structure and bonus determination.

Trust in business can only be restored by an alignment of business intent to society’s needs. This is not “socialism”, but indeed business sense. Shareholders, especially institutional investors, have a vested interest in this alignment because it affects the whole socio-economic order. The most important by far is a focus on customers’ needs and this should be the overwhelmingly predominant criterion in determining executive pay. Most big companies relegate these accountabilities to a much lower level of management. The executive, for the most part, is shareholder focussed and profit driven on the long ago disproven belief that profit maximisation spawns customer satisfaction.

Global research has shown that nearly 70% of informed people believe that “listening to customers” is the most important strategic issue facing business today. Only 36% of these respondents believe that business is meeting this expectation. Of the top five strategic issues listed, four deal with customer expectations. The other, ranked third is the need to treat employees well. Delivering on financial returns is seen as important by only 39% of those questioned and ranks 13th out of 16.

There will always be a debate about whether executives should be paid as much as they are. At the very least there should be far wider and deeper credible research to convince the general public that they are warranted. But companies can go a long way in restoring trust by realigning executive pay and bonus allocations to customer criteria. These are mostly highly measurable, easily understood and pretty self-evident. The time for “murkiness” and smoke and mirrors is past.

After all, customer loyalty and satisfaction are the only valid, sustainable and tangible wealth creators. The value that a company adds is measured by simply deducting outside costs, interest and depreciation from turnover. This should be shared sensibly and equitably not to line the pockets of shareholders or executives, but to meet the legitimate expectations of all of the contributors and to ensure their continued contribution. The simple axiom that the customer is the ultimate evaluator and determinant of wealth creation should be enough to maintain customer focus.

We trust those that have our interest at heart. Customer care and service excellence are by far the best way of showing this care, so trust and customer care are inextricably linked.

Monday, June 11, 2012

Measuring our misery.

Can South Africa join the global move to focus policies on life satisfaction and happiness?

The “self-evident” inalienable right to “liberty, life and the pursuit of happiness” is one of the best known phrases in political science. It is contained in the American declaration of Independence and is a preponderant theme in most modern state constitutions, including our own.

It is perhaps stating the obvious that if society cannot provide its citizens with an acceptable degree of life satisfaction, then that society has failed. Likewise, if economics cannot create or promote that level of life satisfaction for most if not all of its citizens, then it too has failed.

It has been noted that the author of the American declaration, founding father Thomas Jefferson, had more in mind than some wooly phrase. He believed that happiness should be a measurable outcome of government and its ultimate test of legitimacy and justification. Today, more than 200 years later, we know that measuring happiness is not so easy. The word “happiness” itself is ambiguous and open to individual interpretation. There’s also little scientific clarity in the distinction between concepts such as life satisfaction, quality of life, well-being, happiness, joy, contentment and serenity.

The complexities are dealt with in the first comprehensive “World Happiness Report” compiled by American academics John Helliwell, Richard Layard and Jeff Sachs. Perhaps defending the 158 page report’s own ambiguity, it says: “We increasingly understand that we need a very different model of humanity, one in which we are a complicated interplay of emotions and rational thought, unconscious and conscious decision-making, “fast” and “slow” thinking.” But they believe that it makes sense “to pursue policies to raise the public’s happiness as much as it does to raise the public’s national income.”

And this is happening. There’s been an explosion in the last decade or so of authoritative research related to happiness including the Gallup World Poll, the OECD Better Life Index, Adrian White’s pioneering Life Satisfaction Index, the World Values Survey, the European Social Survey, and the Legatum Prosperity Index. The research has started to impact on policy thinking such as in Britain which has instructed its official statistics service to start recording life satisfaction data. The first results are expected this year. The small kingdom of Bhutan has for years had its main focus on a measurement called Gross National Happiness and has hosted a United Nations Conference on promoting the measurement above the current focus on wealth and income measurements. Prime Minister Jigmy Y. Thinley sees Bhutan “at the forefront of a growing movement that intends radically to change global economics, politics and business practices by emphasizing happiness and well-being rather than growth”.

This, of course, raises the question whether national prosperity guarantees life satisfaction and poverty guarantees gross national misery. Or simply, does money buy happiness?

It’s a thesis that has occupied economics for centuries. Up until recently, the Easterlin Paradox denied the link between prosperity and happiness. Its author, Richard Easterlin found that in international comparisons, average reported level of happiness did not vary much with national income per person, and while income per person rose steadily in the United States between 1946 and 1970, average reported happiness showed no long-term trend and declined between 1960 and 1970.

We also have examples such as Bhutan with an average per capita income of less than $6 per day, ranking 8th on White’s Life Satisfaction index, compared with the United States ranking only 23rd, despite being one of the richest countries in the world.

But the weight of evidence is supporting at least some link between prosperity and national life satisfaction. Perhaps Nobel Economics Laureate, Psychologist Daniel Kahneman’s assertion that income may not promote life satisfaction or happiness, but that a lack of it, or poverty, certainly detracts from it, is about as close to an answer as we will get – vague though it may be. He cites the Gallup research which showed a progressive increase in life satisfaction for Americans earning up to $60,000 per year, but an absolute flat line for anything above that.

As with anything human, we are still a long way off from finding absolutes in these measurements, if we ever can. Part of the link between prosperity and happiness could be explained by the fact that virtually all of the research and baskets of measurements include derivatives which are dependent on national wealth, such as education and national health services. More sinister though is the possible role of the growth and spread of consumerism, income disparities, competitiveness and comparisons, all of which would certainly impact on individual assessments of happiness.

This may explain why the United States, which is 1st in the recent OECD ranking of personal incomes and personal wealth, comes 12th in life satisfaction. Denmark is again the highest, as it has been for some years and in other global indices such as Gallup and White. One explanation for Danish contentment is a low level of expectations and low competiveness. Still, they are amongst the wealthiest people in the world, ranking 17th on the OECD measurement. In life Satisfaction, Norway ranks 2nd, followed by the Netherlands, Switzerland, Austria, Israel, Finland and Australia in the top 8. The Better Life Index covers 35 developed OECD member countries.

Extrapolating absolutes from the rankings is risky, but it certainly will make champions of mixed economies happy to know that if life satisfaction is a priority, then relatively high levels of government involvement especially in education and health services are needed. Compared with the United States, Holland has a very high level of government intervention in its economy, so do most of the others in the top five.

So where does South Africa fit in? By most accounts we are a rather miserable lot!

Most of the surveys tend to be dated because of the time needed to do them and their frequency. Gallup, for example, surveys more than half a million people in more than 150 countries.

Its latest survey ranks South Africa’s life satisfaction 73rd out of 155. The percentage thriving was 21, while 71 per cent said they were struggling and 8% said they were suffering. Some years earlier, Adrian White’s rankings put the country at 109th of 178 measured.

We clearly have a very long way to go before we could even remotely think of switching national policy priority to life satisfaction. Unemployment, poverty, low levels of education, poor national health access, and income disparities are all obvious detractors from life satisfaction. There’s also not much hope of getting out of this malaise. The Legatum Prosperity Index, which measures a country’s overall ability to foster the drivers of prosperity, ranks us 69th out of 110 countries.

Our national psyche, our so-called “robust debate”, racial, cultural and political tensions, income disparities and more recently even art-work, all undermine any serious attempts at addressing life dissatisfaction. We need to ask ourselves if Bhutan citizens can be amongst the happiest people in the world on less than $6 per day, why can’t we at least lift our mood on 3 ½ times that? Perhaps this is something the proposed Social Cohesion Summit on what it means to be a South African should be looking at.

We can at least explore other measurements that reflect the national mood to add to the array that Stats S.A. is measuring regularly. The world is affirming more clearly today American Senator Robert Kennedy’s questioning of Gross Domestic Product as the flagship of economic policy. “It measures everything except that which makes life worthwhile.”

In the meantime, there are things that life satisfaction gurus tell us we can do to at least improve our individual life satisfaction: get more sunlight; go for a brisk walk; act with energy; listen to an upbeat song; do things and keep things tidy. I am not sure if these things work. What I can say is that their opposites certainly do not!

We cannot rely on others, including governments to ensure our life satisfaction. It is as much a question of choice as it is of circumstance.

Monday, June 4, 2012

That entrepreneurial flair.

We are all capable of entrepreneurship. It’s a question of attitude.

One of the things they say that I am very, very good at, is to play the role of devil’s advocate. So much so, that an acquaintance once remarked that when I die I would have a secure job at the real thing. It’s not an admirable quality, especially in routine social interaction and it has unfortunately earned me a reputation of being mostly belligerent, argumentative and contrary. While age has tempered it somewhat, old habits die hard and Old Nick’s little prosecutor is always ready for action, to be triggered at inopportune moments.

So when Jan Oprins, the Belgian owner of the land on which I have rented an isolated farmhouse, asked me to play this role in assessing a venture he was planning, I jumped at the chance with great relish. He and a small entourage outlined the venture to me one morning. I flayed in with great gusto and at the end of it had genuinely and thoroughly convinced myself that it was not a good idea.

But Jan did not listen and a few months down the line, I am surrounded by the signs of large effort and capital investment in getting the scheme going.

Jan, you see, is an entrepreneur possessing the most important attribute by far of entrepreneurship – an ability to go beyond what he knows with certainty he is going to get out of it. He has some of the other qualities too: passion for his subject, which is horticulture, patience beyond the norm, and a “code writer understanding his code”. The quote is from a Time Magazine article of many years ago, that examined successful entrepreneurs in an attempt to determine the “formula” for their success. They concluded that economic laws simply could not explain this success and that entrepreneurs “stood outside the system to which they are so crucial”.

Jan’s entrepreneurial flair is evident in many other ventures which his website confirms. He has a particular passion for bamboo and his interest in South Africa goes back many years when he intended to launch a bamboo project with the backing of a government agency. This backing fell through, but Jan kept the land, spent quite a bit of money on its upkeep and recently, so many years later started cultivating bamboo. He has now added another venture, which was the subject of my scepticism.

My behaviour reflected the other side of the coin, one which so often nips entrepreneurship in the bud. If I had dealt with anyone else but Jan, there would have been a good chance that the venture would have stalled. But strangely, and inexplicably even to me, now that he has gone ahead, I am convinced that indeed it will be a success.

I am reminded of a statement by the flamboyant Richard Branson which reflects this “incalculable risk” approach often displayed by entrepreneurs: “I never get the accountants in before I start up a business. It’s done on gut feeling, especially if I can see that they are taking the mickey out of the consumer.”

Many of us have experienced those moments when we are prepared to go beyond the calculable “what’s in it for me” and when we are driven by something close to impulse that puts us on a different path and often changes our destiny.

Many books and articles have been written on entrepreneurship. If you add the volumes written about starting your own business, books on personal success, and the auto/biographies of great entrepreneurs, you have a large chunk of non-fiction publications today, ranging from Stephen Covey’s 7 habits, to Collins and Porras’s

“Built to Last”. Yet a clear formula or DIY kit for entrepreneurship remains elusive. The latest Global enterprise Monitor report shows that corporate businesses are also not very good at unleashing entrepreneurial behaviour internally.

Some may be good at product improvement and development but the corporate and big business emphasis on short term maximum returns means that for the most part they will be constrained by concepts such as risk management, calculated risk and cost/benefit calculations, all of which tend to numb entrepreneurial flair. So, as in the past, the great entrepreneurs of the future will tend to come from self-employed individuals and the smaller enterprise.

But there is an important condition that has to create a fertile environment for entrepreneurship to flourish. It is one of attitude – a Jan or a Jerry as in my opening illustration; someone prepared to look beyond immediate self-interest benefit, or another that constantly tries to find guarantees of benefits. Having created a generation that for the most part is driven by “what’s-in-it-for-me”, and will not move before getting a firm answer, we have also created a rather barren environment for risk taking and entrepreneurship.

The “what’s-in-it-for-me” culture has to be remedied from the earliest age possible. The need for promoting entrepreneurship at teen level has been recognised by the SA Teen Entrepreneur Foundation, whose founder Lydia Zingoni writes: “South Africa is not promoting very well a culture of entrepreneurship among the very young. We have to empower these young people into realizing that there are no jobs out there and they have to start thinking right now while they are still young and protected by family. Instead, most government programs are promoting a dependency syndrome rather than self-empowerment and creativity.”

For most people, the concept of “being an entrepreneur” may appear daunting. I’ve always believed that entrepreneurship itself is less important than entrepreneurial behaviour. This behaviour means simply turning down the self-absorbed, self-interest volume and exploring rather what we can contribute, or what difference we can make to others’ lives. We are daily confronted with many of such opportunities. Multiplied over a whole population and inculcated from the earliest age, the difference in national behaviour could be as significant as producing another great global invention.

At the very least, it makes us receptive to opportunities, one of which could launch us into being the next great entrepreneur.