By Max Rashbrooke*
Opinion - The government has in its sights one of New Zealand's least endearing and most egregious oddities: its abnormally high pay for public sector leaders.
State Services Minister Chris Hipkins has announced he is putting "the brakes on the growth rate of chief executive pay" by scrapping public service CEO bonuses. Photo: RNZ / Dan Cook
In the last couple of days, the government has announced it is both freezing salaries for MPs for a year and abolishing performance pay for the chief executives of major departments.
These moves gel nicely with the crusade by the state services commissioner, Peter Hughes, against public sector salary hikes, and with other steps to limit increases at Crown agencies. They are also part of a longer running trend. In 2015 John Key changed the rules on MPs' remuneration so that it could only rise in line with wage increases for ordinary public servants - a move for which he received insufficient credit.
All this is driven by high levels of public concern about economic inequality. The biggest inequalities in pay are not in the public sector. But it is an area politicians directly control; and unless they sort it out, they can hardly demand that the private sector get their act in order.
Moreover, one of New Zealand's bizarre quirks is that our public sector chief executives are paid more than those in any other country (with the sole exception of Italy, hardly a model of good governance). This may reflect the fact that we have, post-1980s, embraced the idea of running departments like businesses more enthusiastically than any other country.
Some of our government CEOs are on salaries of $600,000, $700,000, $800,000 a year. It is hard to see any justification for such extremely high salaries, especially given our small size.
Nor is there evidence that you need such salaries to attract top performers. The idea of keeping pace with the private sector is a distraction: the latter will always pay more, often significantly so.
Overseas government CEOs seem to run their departments just fine on much less money. And in any case people are supposed to be in the public service because they have some sense of, well, public service, rather than being motivated by money.
Cutting chief executive salaries, saving an estimated $4 million by 2022, will help the government pay the Living Wage for its staff at the other end of the spectrum, so it makes financial sense - as well as boosting overall well-being, since the extra money will make a much bigger difference to those who have less of it to start with.
But to focus these moves, the government needs some kind of target. That could come in the form of a pay ratio, in which the salary of a chief executive is set as a multiple of the lowest paid staff's salary. There is no 'right' multiple, but it could be five, eight or ten times - something in that order.
Pay ratios are attractive because they embed an idea of connectedness. They allow organisations to increase chief executive salaries - but only on the condition that everyone else's pay rises too. Since an organisation's success depends on everyone's efforts, that seems only fair.
Thanks to Key, MP salaries are already in a pay ratio with the rest of the public sector. But given that the basic MP salary of $164,000 puts them automatically into the top 2 percent of income earners, that ratio probably needs to be lowered a little.
For chief executives, the question is what salaries will be offered to new hires. Assuming their poorest paid staff are on the Living Wage of roughly $43,000, a ratio of - say - 10 times would limit newcomers' salaries to around $430,000 - still a very large amount, but half what some currently take home. It would be a shock to the system, undoubtedly. But that is arguably just what the system needs.
* Max Rashbrooke is a senior associate at the Institute for Governance and Policy Studies, and has written widely on inequality.