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.