Public Sector Pay

Has the community the right frame of reference when expressing views about the level of remuneration paid to employees retained by Commonwealth, State or Local Government organisations?

Egan Associates have observed over a considerable time the challenges faced by Government organisations in adopting and implementing senior management reward, which reflects the intent of the Corporations Act in relation to reasonable remuneration, while also managing a community perception of what is reasonable or acceptable.

All citizens are shareholders in Government enterprises as their taxes either directly or indirectly support Government operations.  In that context, Governments have a far more complex and onerous task in managing pay than the vast majority of major listed companies, whether on the Australian Securities Exchange, the London exchange, or any of the major European, Asian or North American exchanges.

The business of Government is more diverse than a major listed company.  The expertise which Governments call upon to provide services to the community cover virtually all occupations across the demographic spectrum – from school leaver through to individuals of national and international prominence in their field of endevour.

Governments have traditionally held the view that remuneration of their employees should follow the market, not lead the market.  The average voter looks to Government to provide a quality and timely service across a diverse range of activities which impact on their lives, the lives of their children and, for those with aging parents, their parents’ lives.

Voters, citizens and the community expect Governments to keep them safe and provide efficient and cost-contained services to enable them to go about their daily lives securely and in relative comfort.

Most employed citizens, including those who are not currently eligible to vote at Local, State and Federal Government levels, are generally not looking for a dividend in a financial context.  They are, however, subconsciously expecting valuable services to be provided in exchange for the nation’s tax dollar, but not necessarily value-created.

This is despite the fact that much of what Governments do is critical in creating future value for the community.  Creating future value requires engagement and accountability by Government for policies and/or operations which impact on their citizens’ quality of life, including affordability of housing, food and associated necessities; the cost and quality of healthcare and related services; education; personal and community security; and roads and public transport.  Expectations are also that Government will competently and consistently support a breadth of private sector activities which enable enterprises to flourish and to profitably export services and goods manufactured or extracted from the nation’s natural resources.

The community is generally critical of the provision of poor service by Government and on occasions of cost blow-outs by Government on infrastructure or other projects.  However, the level of criticism such matters evoke from constituents can rise or fall depending on the perceived level of discomfort or pain experienced at any particular time.

In a privately-owned company, if a serious mistake is made, a family or collection of families or individuals can suddenly lose a substantial proportion of their wealth.   Such a loss could be triggered, for example, by a poor investment, an error in estimating the cost of a development, or the failure of a particular product to meet expected objectives.  The result can be not only catastrophic for the owners of the company, but may also have consequences for employees of the private company when staff lose their jobs.

In a listed public company, failures receive close scrutiny and comment by institutional investors, journalists and individual shareholders themselves.  Shareholders will often refuse to support resolutions put by a Board, the increasing effect of which is the retirement of Directors or the Chief Executive and the separation of senior executives.

By contrast, significant cost blowouts or policy failures by Government may draw comment from the press, however such comment appears to have only limited immediate effect on the key proponents of the Government’s initiative.

We hear increasingly of Government under-estimating costs in the realm of billions of dollars, not millions.  We are told often of initiatives taken on the advice of Government officials which have failed to deliver as expected.

It often takes governments, through our political leaders, a considerable period of time to address failure.  Those who make major decisions, notably Ministers in Government on the advice of their staff and senior public servants, remain in their position until a future election and are rarely directly held to account for significant failures in cost management and planning.

Two key questions for Government are, “Would substantially increasing the pay for their most senior executive roles lead to the provision of better and more timely advice, more effective implementation of programs involving hundreds of millions of dollars?  And could the nation save, say, between $10 billion and $50 billion a year in cost overruns if an additional $200 million was spent in attracting, securing and rewarding the nation’s best talent?

I recall a conversation I had with one of Australia’s leading businessmen when I was a young consultant.  I was commissioned to undertake, as part of a team, a benchmark study in a medium-sized manufacturing company.  This was during an era when Chief Executives of major corporates were paid around 15% of current fixed remuneration levels.  The major shareholder, on his initiative, decided to put $2 million on the table if the leadership team were able to implement a significant transformation within an 18-month period.  Achieving this transformation was expected to deliver between $50 and $100 million in increased wealth for the major shareholder.  The objective was achieved.  Management received a bonus well beyond their expectations and many multiples of prior earned bonuses.

While this case study reflects an early observation as a young consultant, it reinforces what I continue to observe today in major private companies and in a small number of listed public companies where key shareholders/directors reward a committed team for delivering dramatic transformation which flows through to all shareholders/stakeholders.  I have also observed that without significant commitment for two or more years, key transformational initiatives are often not achieved to a standard of sustainable excellence that can be delivered by hardworking, focused and committed staff.

One of the earliest tenets that I have followed over a long career as a remuneration adviser is “what gets rewarded gets done”.

Would voters support Government rewarding key teams, including the general workforce which they employ, with meaningful bonuses where they deliver programs on time, within budget, to the highest quality standard?  Or is the community’s preference to see cost blowouts in the billions of dollars with only a small number of dedicated Government employees carrying the can for program implementation where their advice may not have even been sought?

The increasing demand for outsourced resources and the potential that Government bodies are not able to either attract or retain their share of the employment market’s best talent, raises a number of challenges for the future.  Should Governments review their employee reward paradigm, modify their employment practices and upskill their better performing employees to assume increased engagement in policy development and planning and empower them to assume full accountability for service and program delivery?

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