Widening pay gap 'can be fixed'

The pay gap between the highest and lowest earners is getting wider. A trend that, says one researcher, can be traced back to the 1980s.

According to the OECD report 'Society at a Glance 2014' the highest paid 10 per cent of workers in New Zealand earn - on average - eight times more than the poorest 10 per cent.

The ratio in Australia is nine to one, and in Switzerland it is seven to one.
Switzerland is interesting because the pay ratio is something the Swiss are talking about.

In January, they got to vote on a proposal to enforce a ratio of 12 to one - the proposal was defeated. Had it been made law, the highest paid member of staff of a company in Switzerland would not have been able to earn any more than 12 times the salary of its lowest paid employee.

Paul Barber, policy adviser at the New Zealand Council of Christian Social Services, says that based on his research, low and middle incomes have barely risen [above inflation] during the past 30 years. "But the top end incomes have more than doubled over the same period," he says.

"At about $1.5 million a year, the CEO of Mighty River Power earns 53 times the minimum wage, Air New Zealand's CEO earns 22 times minimum wage, and the Prime Minister is on 15 times minimum wage.

"A teacher earns 1.6 times minimum wage and ... [the] unemployed ... are on 0.4 of the minimum wage."

One reason for chief executives doing so well, says Barber, is that boards are advised by pay consultants who "ratchet up pay".

"As boards also test their own remuneration from similar information they tend to vote themselves similar increases - so boards and director fees rise to match the executives' pay. They are rewarding each other.

"From the evidence we have looked at, it appears that if you are able to restrain the gap between the highest and lowest paid within an organisation then it is good for the organisation, as well as for those working in it."

The OECD report says that in 2010, more than 10 per cent of working Kiwis survived on less than half the median household income (about $844 a week). But using the median income as a yardstick can lead to distortions. For example, if a firm has two employees, with one earning $100,000 a year, the other $35,000, the median income at that firm is $67,500.

The OECD report says household income in New Zealand has suffered a "large decline" since 2008 - NZ was put in the same basket for income as Mexico, Spain, Estonia and Greece.

Barber says high pay for the top 10 per cent tells the low paid that they have no value, that the work of CEOs is "hundreds of times more valuable to a company than their work".

"It makes low-waged people feel that they don't matter.

"Their self worth, motivation, general mental well-being suffer.

"It is not only the highest paid people in organisations that skew the pay scale, it sucks money away from firms that would otherwise be available for lower-paid people.

"There's also the argument than giving more money to someone who is already earning a lot doesn't improve their performance.

"But if you look after all your workers, and ensure the gap isn't too strong, it builds that sense of cohesion, commitment, and engagement among workers because they feel valued. Worth considering is the demotivating effect of poor wages."

Low pay not only affects people in their everyday lives, it hits the whole economy. According to the OECD report, New Zealand appears 9th in a list of countries where people cannot afford enough food.

The data comes from a Gallup World Poll where people were asked if, at any time in the past 12 months, they did not have enough money to put food on the table.

In 2006/07, 8 per cent of Kiwis surveyed said having money to buy food was an issue. By 2011/12, the figure had more than doubled to 17 per cent - one in every six Kiwis can't afford enough to eat. In Australia, one in 10 people struggle to afford food.

"If lower incomes were raised it would be a real stimulus, and it appears it would be really do-able.

"New Zealand is a very wealthy country overall, it's just we've become much worse in the last two or three decades in distributing the wealth."

The recession hasn't helped, and the OECD report shows higher unemployment and lower real wages in NZ have brought down household market income by 5 per cent (or more) a year. Closing the income equality gap could be addressed quite easily, says Barber. But it will take a generation (15 years) to undo. "Companies could choose tomorrow to make changes."

• Steve Hart is a freelance journalist at www.SteveHart.co.nz