Headlines in recent weeks have pointed once again to the tendency for the highest salaries and remuneration to keep increasing faster than those of other employees (see Fairfax news: “Bosses’ pay rises outpace workers'”).

The highest paid government department heads have salary packages of well over $600,000, according to the latest figures from the State Services Commission, which reports on the salaries of several hundred CEOs and senior managers working in government departments and publically funded bodies such as universities, DHBs and local authorities.

A growing number of private sector CEOs have pay packages well in excess of $1 million, and the reported average pay package is around $355,000. According to consultants Strategic Pay, the average public sector CEO earns slightly less than this; meanwhile not-for-profit CEOs earn on average 30 per cent less, although they are still on an average of $224,000.

One argument often advanced to defend these salaries is that, “It’s the market.” Those with great ability are highly valuable, and therefore get paid more. However, according to research by New Zealand academics Professor Glenn Boyle and Dr Helen Roberts, the more likely reasons why salaries in listed companies are so high are:

1. CEOs are often on the remuneration committees that decide their own salaries. In New Zealand that occurs at about one-third of listed companies.
2. The link between performance pay and increased shareholder wealth is weak, so the increases are often not for exceptional performance.
3. “Keeping up with the Joneses” effects. Directors and CEOs see what others are paying and try to match it – regardless of whether this is in the wider interests of the company.
4. Directors’ fees have also been increasing as rapidly as CEO pay, so they are looking after each other’s interests very well; but what about their employees, customers or wider community?
5. Nobody tries to stop pay increases. Shareholders have limited power to veto pay increases and mostly don’t exercise it.

In a 2010 presentation on their research, Prof Glenn Boyle and Dr Helen Roberts (Executive Compensation in New Zealand: the Good ,the Bad & the Ugly) depict the way that CEO pay and board chair fees have followed each other upwards, while shareholder returns lag well behind and worker compensation has hardly risen at all.

What Can be Done About it?

The issue is not unique to New Zealand. In the UK, an independent High Pay Commission, in its report ‘Cheques with Balances’ made a number of recommendations that included:

1. Paying a salary to CEOs rather than the complex and confusing packages that obscure the real level of  remuneration that is received
2. Requiring fund managers and investors to disclose how they vote on remuneration.
3. Introducing employee representation on remuneration committees.

It is timely to look at establishing such a commission in this country. The New Zealand Remuneration Authority exists, but only to set the salaries for Members of Parliament and judges and certain other public sector workers. It does not scrutinise private sector pay. In addition, it is required to consider “fairness to the taxpayers or ratepayers who ultimately foot the bill”, but this requirement is not currently interpreted to include trying to avoid increases in income inequality. A dedicated High Pay Commission would provide much greater scrutiny across the board.

Pay gaps within institutions also deserve further attention. A recent British report looks at how a pay ratio – the relationship between top and bottom pay in a particular organisation – can be reported on or controlled. Although there are complications in calculating and applying these ratios, the report concludes that they are a useful way of controlling top-end incomes and linking them to the incomes of other employees within an organisation. So these ratios might help avoid the current situation, where pay rises rapidly at the top but not at the lower end. That’s something worth thinking about.