Monday, July 15, 2013

The compromise conundrum.

Wage compromises are not a solution in unforgiving markets.

When stances are stubbornly held in adversarial relationships annual compromises in wage negotiations amount to nothing more than temporary patchwork and ultimately simply become untenable.

Management will adjust to the compromise by cutting costs deeper, and workers return to their positions bruised, bloodied, seething with resentment and waiting anxiously to learn whether they will be the next to be turfed out of a job.

The writing has been on the wall for a long time in the mining industry, one of the country’s biggest employers and a hotbed of distrust and violent confrontations, exacerbated in no small measure by union rivalry and by the fact that investors have to seek high returns in a volatile environment with a naturally depreciation asset. In time, a mine simply dies when it runs out of payable reserves. Paradoxically, the only certainty one can establish in such an environment is through flexibility. In turn, flexibility simply cannot accommodate rigidly held demands, assumptions and unrealistic expectations.

It is further severely threatened when extreme if not outrageous positions are taken at the outset of an obscene haggle. This week’s opening gambit by the National Union of Mineworkers was for a 60% pay hike and by its rival AMCU for 100%. It is by far the most extreme demands yet that the industry has had to face and comes on the back of highly costly, violent and disruptive action that has had the industry staggering for months now.

In addition, the relentlessly tightening pincer of a decline in commodity prices on the one hand and rising costs on the other is having devastating effects on global mining with many mine operations facing closure. While some argue that this is a time for compromise on all sides, it could also be argued that it is the time to fully re-examine a wage pricing model that is deeply flawed to begin with.

That model has created the ever widening gulf between employer and employee, between capital and labour, between executives and average worker. On the one hand we have had the industry pleading its cause through some stark reality check figures outlined by Moneyweb Mining Editor, Geoff Candy that put the cost of producing one ounce of gold and replacing that ounce with a new one at between $1,250 and $1,500.

Then we had Labour correspondent Terry Bell earlier defending a double digit pay increase on the basis that “the wage deals struck by most workers over the past five or six years, let alone over a longer period, reveal that these workers have effectively become poorer; that their disposable income has bought less and less as each year went by”.

Mining, like few other industries, has very limited choices. It is not the place where you can bring your needs and wants to the “market”. That market is unforgiving, overwhelming and absolutely dictatorial.

Ultimately it is so with all markets. The ultimate paymasters of profits, wages and all benefits are the end buyers, not management, unions, or the outcome of “negotiations”, belligerent or otherwise, between the beneficiaries.

Wealth distribution has always been secondary to wealth creation. Yet, under the veil of being “market driven” we have made the secondary market the primary one, arguing that collective coercion on the part of labour; kowtowing remuneration committees on the part of executives, shareholder value on the part of capital, and tax decrees on the part of state, represent true value and contribution to the end buyer.

We are being pushed by reward, not being led by contribution. It is in line with the flawed economic construct we have developed over decades that panders primarily to our selfish needs and wants rather than our natural and instinctive desire to do something meaningful for others, the ultimate source of meaning and contentment.

But even that would be tolerable if those markets that should guide wealth distribution were unfettered and functional; where rewards at a general labour level were not determined by panga wielding mobs, unrealistic expectations and rigid legislation; where at executive level they were not the outcome of smoke and mirror board-room lotteries to create 50-60 times pay differences between highest and lowest; where productive capital is not seduced by quick and short-term returns either in flaky financial instruments or by neglecting other constituents; and where taxes were aimed primarily at enablement and not dependence.

Only a truly functional market for skills, qualifications, experience and aptitude can be an appropriate guide to pay differences and how the labour share of wealth creation should be subdivided. The overall strategic pillars of sensible distribution are meeting the legitimate expectations of all of the stakeholders and encouraging continued contribution. But even then, the actual amount has to be aligned to wealth creation itself and each reward ultimately sanctioned by those who pay for it, the end user or customer. If the recognition of value added by the end buyer is volatile according to changes in supply, demand and prices, then rewards themselves have to be flexible and constantly aligned to those changes.

That would be a purist market view – perhaps not attainable for decades to come. But what we now have is broken and unsustainable.

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