Pay and Productivity

Throughout the release of company results for the first half of the 2013 financial year, the narrative has been about reducing costs to offset a lack of near term growth prospects. As always, a large part of any company’s cost base is the remuneration it pays its employees. This includes direct salaries and benefits and indirect payments.

The notion that Australian wages have become too high has been one element of the productivity debate running over the last year.  Treasury’s Macroeconomic Group Executive Director David Gruen noted in a November 2012 speech that in the decade since 2000 much of the increase in Gross National Income (GNI) per person came from a rise in Australia’s terms of trade.  Previously, the lion’s share came from labour productivity increases. With commodity prices falling from record highs and labour utilisation to come under pressure from an aging population, Gruen said only productivity growth can produce the income increases Australians have become accustomed to.

Contribution of productivity to income

Source: Treasury

Yet Australia’s productivity growth has been slowing over the last decade and has only recently shown signs of what may be the start of an upswing, according to the Reserve Bank of Australia’s December 2012 quarterly bulletin. This slump has led to some concerns on whether current wage expectations are sustainable.

Some industries consider the issue of wage costs to be particularly acute. The Minerals Council of Australia stated in a 2012 report that “with construction wages amongst the highest in the world and labour accounting for 35% to 50% of project construction costs, there is ample evidence that our cost structure for major projects is much higher than global competitors”.

The 2013 Hays Oil and Gas Salary Guide survey on the Oil and Gas sector pinpointed Australia as paying the highest average wages in the world. In the retail industry, employers have spoken out about the high cost of paying penalty rates. In manufacturing, the high dollar has meant the sector’s international competitiveness has suffered without high productivity growth to balance it out. The rise in wage costs can be seen in the graph below comparing Australian and international hourly rates in the industry.  

United States Bureau of Labor Statistics

Meanwhile, the Australian industrial relations landscape continues to evolve, with changes that will affect the cost of hiring either being proposed or implemented in the lead up to the September Federal election. These include a threatened tightening of the granting of 457 visas, proposed legislation providing broader rights to employees to request flexible work hours, and the beginning of the implementation of the gradual increase of superannuation from 9% to 12% of wages.

This month, the Australian Council of Trade Unions and the Construction, Forestry, Mining and Energy Union also asked in a Fair Work Commission submission for apprentices to receive a substantial pay increase, which the industry has said could risk up to 12,000 apprenticeships as it becomes too expensive to continue to hire unskilled workers in the current high cost environment. 

The ACTU followed its submission on apprentices with the release of a study stating real wages have not kept pace with labour productivity growth over the last decade. It stated that although real output per hour worked has risen, real hourly labour income has not increased at the same rate, resulting in a fall in the labour share of national income and an increase in the capital share of that income.  The union said that to make up for this loss in the labour share of total income, wage increases would have to be higher than labour productivity for a period of time.

Although most of the productivity driven wage discussion has been around employees receiving wages of less than $75,000 annually, there is also tension both in Australia and globally on the level of executive wages. In Australia, the focus has been on transparent disclosure on pay levels including incentive awards, while in the European Union, member states have gone as far as to agree to cap the bonuses of banking executives.

Egan Associates revealed in its August 2012 Key Management Personnel report that there have been many cases since the Global Financial Crisis where executive reward was misaligned with shareholder returns, current asset values and market capitalisation. It is clear in the current times of cost consciousness that  Boards need to be productivity-minded when developing remuneration structures for executives, aligning pay with performance improvement and shareholder returns. We are currently investigating the productivity of Australia’s remuneration practices in comparison to the rest of the globe and look forward to sharing our findings with you in the future.

Comments are disabled