Following the recent decision of the Fair Work Commission in relation to minimum earnings, there has been a considerable amount of press comment and research data reflecting on the rate of growth in CEO reward.
In our June/July Newsletter, we published an article highlighting the movement in fixed remuneration over the past decade, transitioning from the period prior to the Global Financial Crisis to the current period where a degree of economic growth is in evidence.
At the ACTU Congress on 18 July 2018, President Elect of the Federal Labor Party and member for Lilley, Wayne Swan, described as hypocrisy and wage theft the earnings gap of “several hundred times” between Australia’s highest paid CEO and the average employee.
In his speech, “Trickle-down Economics & Inequality in Australia”, Mr Swan, stated that Australians,
“are crying out for leadership to end trickle-down and deliver some economic justice and fairness to our nation…In theory, trickle-down economics is fundamentally about redistributing resources to the already wealthy or advantaged … in practice, trickle-down economics is a recipe for rampant income and wealth inequality. Its reality is tax cuts for the rich, deregulation for the powerful, the destruction of social safety nets, the end of universal health and education programs and wage suppression for working people. Trickle-down gives the most to those who need it least and the least to those who need it most.”
Mr Swan went on to state that recent tax cuts provide the top 20% of earners with the greatest benefit in aggregate and that wage share is at an all-time low.
In that context, Mr Swan stated that the trickle-down agenda is seen in penalty rate cuts, the stacking of the Fair Work Commission, the dissemination of public sector workforces and the outrageous behaviour of employers in enterprise bargaining.
Notwithstanding, he acknowledged that this trend exists globally across developed economies.
Wayne Swan’s speech put significant emphasis on a redistribution of economic wealth and offered Labor’s alternative of “inclusive prosperity”. To achieve this, Australia needs to invest in its human and physical infrastructure to lift productivity, to build a more progressive and growth-friendly tax system thereby providing incentives for work and investment and reduce the “political clout” of the wealthy elite.
Mr Swan identified four pillars of what he describes as ‘Laborism’:
- Full employment
- Stronger worker voice
- Taming corporate excess
- Progressive tax
In his concluding remarks Mr Swan stated that if company Boards can’t impose pay restraint on executive salaries, it is time for shareholders to take matters into their own hands and agitate for a binding vote to cap CEO pay.
While any presentation intended to be persuasive draws upon significant outliers for the purpose of illustration, the paper highlights key areas which are clearly on the agenda of Federal Labor. These broad initiatives need to embrace the interleaving of population growth, purchasing power, planning and productivity.
Employers need to plan thoroughly and in alignment with expected outcomes and related profits; they need to secure suitably qualified and trained talent to fulfil both existing and future roles which are increasingly technology-focused.
Productivity should not be expected to result from employees working longer hours, but rather accomplishing more in each hour of work.
Australia’s population growth has provided an increased workforce capacity leading to increased consumption, however wages have paused. This is due in part from under-employment of those seeking work and from labour productivity not increasing at a rate which counter-balances lower wages in economies able to supply consumables to meet Australian demand.
It is in this context that Boards should seek to identify key factors to improving labour productivity and therefore profitability arising from those improvements. Such measures should initiate a trickle-down mandatory performance objective from the CEO to the “shop floor”, acting as either a source of reward or a gateway denying reward. Employers who are not focusing on improving productivity and enhancing the welfare of all stakeholders will be increasingly challenged, while those who develop reward programs which share productivity aligned profit improvement with their workforce will become employers of choice.
In a recent article by Professor Steven Bell from the University of Queensland entitled, “How Rising Inequality is Stalling Economies by Crippling Demand”, Professor Bell comments on the rate of growth in executive reward compared to ordinary wage growth.
While he has taken a global view, Professor Bell’s analysis reflects on issues raised by the Fair Work Commission, other academics and economists. Referring to a book which he wrote with Michael Keating entitled, “”, Professor Bell argues that rising inequality in wages share is weakening economic growth across economies by reducing aggregate demand. Professor Bell acknowledges that this view differs from mainstream economists who argue that growth stems mainly from the supply side of the economy.
Professor Bell’s research considers the periods both prior to and post-GFC, where top income earners’ share of wage increases had outstripped those in the lower deciles of earnings across many advanced economies. His thesis in a broad conceptual context is that competing economic claims can potentially deliver various combinations of inflation, wage stagnation, growing inequality, weak demand and slower economic growth.
The central proposition of his thesis is that a “fairer share” links income distribution to economic growth. In that context growth is substantially dependent on a more balanced distribution of income.
Considering Australia’s recent economic progress, Professor Bell observes that reforms over recent decades to improve market flexibility have underpinned one of the longest expansions in capitalist history. He also observes that wage share in Australia in 2015 was similar that of 1990 and only marginally higher than that of 1960.
Professor Bell’s research indicates that income inequality has risen less in Australia than in many overseas countries and although this is evident, there are clear signs that wages are stagnating, and household debt levels are high.
While acknowledging the desire to improve the balance of income distribution, Professor Bell references the criticality of wage-supporting measures to ensure our workforce is equipped to adapt to the rapidly changing workplace and notes the importance of a “new agenda” which supports economic growth and transformation based on innovation and technological change.
Professor Bell acknowledges the role of government in promoting demand as well as supply. Demands on the training and education sector and the commitment of employers to embrace innovation and drive productivity through improved supervision and on-the-job training will increase.
While not specifically focusing on labour productivity, it is evident in Professor Bell’s thesis that productivity will be an important ingredient in reducing perceived income inequality.
As an adjunct to improving workforce productivity, the role of innovation and the adoption of emerging technologies is critical. Economic prosperity will require increased employee accountability, an increasing relevance of employee on the job training, and the preparedness of employers to retrain and re-equip their employees.
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