Executive Remuneration and the Minimum Wage

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This month’s report describing the Fair Work Commission’s decision on whether to increase the minimum wage reached 165 pages. Its extreme length and complexity showed how contentious remuneration is, as much at the bottom of the remuneration scale as the top.

The Fair Work Commission ruled to increase the minimum wage by 2.6% to $622.20, or $16.37 an hour based on a 38-hour week. Employees on modern awards will receive a 2.6% increase. The increase comes into effect on 1 July.

Naturally, neither business nor union stakeholders were satisfied with the decision – business groups such as the Australian Chamber of Commerce and Industry had wanted an increase of $5.80, while unions had angled for more. Most prominent was the Australian Council of Trade Unions which had sought a flat dollar increase of $30 for awards to a certain level and a 4.2% increase for higher awards – the reason for the differentiation was that with flat dollar increases, the top award levels receive a relatively smaller increase and the difference between the award brackets becomes smaller over time. This is the reason for the Fair Work Commission using the 2.6% increase rather than a flat dollar amount for the award.

Prior to the increase, Australia had the highest hourly minimum wage of OECD countries when deflated by national consumer price indices and converted into $US, although only the third highest on a purchasing power parity basis. 

OECD minimum wage comparison

Source: OECD StatExtracts, Real Minimum Wages

Whether the Commission’s decision was the correct one or not, it did provide insight for those normally uninvolved in the process of setting remuneration on how truly complex it can be – advisors must take into account a myriad of factors and consider data which in some cases might not be as complete as could be wished. Simply obtaining a set of data with which to benchmark against peers is not adequate. This would be like the Commission pegging the minimum wage to a percentage of weekly average earnings.

Instead, the Commission sets out to establish a minimum wage and modern awards that embody a “fair” minimum safety net taking into account a variety of factors including:

  1. the performance and competitiveness of the national economy, considering factors such as productivity, inflation and employment growth and the effect of any decisions on these elements;
  2. social inclusion through increased workforce participation;
  3. relative living standards and the needs of the low paid;
  4. the principle of equal remuneration for work of equal or comparable value;
  5. the need to encourage collective bargaining;
  6. providing a comprehensive range of fair minimum wages to junior employees, employees to whom training arrangements apply and employees with a disability;
  7. the need to promote flexible modern work practices and the efficient and productive performance of work; and
  8. the need to ensure a simple, easy to understand, stable and sustainable modern award system that avoids unnecessary overlap of modern awards.

If we were to translate these issues into executive remuneration determination, we would state that we are looking to set “reasonable” remuneration that takes into account:

  1. the performance and competitiveness of the national economy, considering factors such as productivity, inflation and employment growth;
  2. the likely effect of executive remuneration levels on turnover and team morale;
  3. relative living standards and the needs of the executive – we note that this is receiving particular attention at the moment in the US;
  4. the principle of equal remuneration for work of equal or comparable value;
  5. a system for differential pay based on accountability, experience and training requirements;
  6. the need to incentivise executives to excel through well targeted performance pay;
  7. the ability to be flexible with pay given varying workplace and industry circumstances;
  8. the ease of understanding remuneration arrangements, both to ensure executives remain motivated and red tape is minimised.

If your remuneration committee and human resources function is not weighing factors such as these, the question needs to be asked should they?

 A brief summary of the Fair Work Commission’s decision:

Around 1.5 million Australians are reliant on awards for their wages. The $15.80 per week minimum wage increase of 2.6% was lower than last year’s rise. The Commission said the lower figure was due to the expectation that GDP growth would fall below trend due to lower commodity prices and the still high dollar. Meanwhile, inflation would remain within the Reserve Bank of Australia’s target band of 2% to 3%. Employee remuneration growth was expected to reflect the below trend outlook and a slightly higher unemployment rate. The December quarter’s 2.4% labour productivity growth could not be yet considered as a trend, but might lead to the ability to raise the wage in next year’s review.

The 0.25% increase in the superannuation guarantee rate moderated the Commission’s final number, as did concerns that last year’s minimum wage rise had been too high given the forecast inflation increase did not eventuate. The effects of the carbon tax were not considered, as the Commission believed them to be adequately compensated for elsewhere.

Although the Commission acknowledged median wages were being uplifted through a shift to higher skill jobs across the nation, it stated that the minimum wage had decreased as a proportion of full time adult median earnings from 57.5% in 2002 to 52.7% in 2012. The Commission’s view was that earnings inequality was increasing: for each decile, the lower the earnings, the lower the rate of growth in earnings. It was concerned that if this trend was not addressed, it would have broader implications for the economy and Australia’s social cohesion. It believed, however, that the minimum wage could only provide a certain amount of leverage on the issue and that the tax transfer system was capable of more targeted assistance.

Despite submissions asking for differential increases on an industry by industry basis, the Fair Work Commission maintained its position that there should be one level of increase.

It noted that some industries were performing much better than others, but believed this performance was due to structural change and that it was not appropriate to shelter businesses undergoing such changes with lower minimum wages, especially as they would have only a small effect. Any exceptions should only be provided to address temporary and not structural issues. The Commission considered Enterprise Bargaining Agreements to be the method for differentiation between industries.

Small business was given no quarter, with the Commission stating there was no evidence to suggest  the economic conditions for small business was materially different than those for businesses generally.  High levels of turnover were typical of small business and were not indicative of the economic conditions.

The Commission considered that any increase in the minimum wage was unlikely to adversely affect productivity, and could in fact increase it as organisations sought ways to reduce labour input required for the same amount of output. It also could find no evidence that an increase in the minimum wage had a significant effect on employment levels.

It was not concerned about a recent fall in the labour participation rate, saying evidence pointed to this being due to the aging workforce rather than any effect of a higher minimum wage.  It did note a higher level of underemployment in award-reliant industries as opposed to others, but also pointed to the fact that the industries in question had a higher percentage of part-time workers who were more likely to experience underemployment. It also believed the minimum wage was still sufficiently low compared with collective agreements to provide incentive for employees to seek such agreements.

The Commission said it would look for submissions in next year’s review on the ACTU’s premise that the labour share of productivity growth had fallen in recent years, which we mentioned in our March newsletter

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