This approach to increasing pay in the public sector neglects the link between pay
and productivity. Increasing the taxes on the private sector could cause an exodus
of companies in the South African market who would view the tax burden as
excessively high – consequently shedding more local jobs. This asks the question:
If simply raising pay can have many harmful issues attached to it, then how can
we increase pay and productivity?
In micro-economic theory, firms will increase production until the point where
marginal revenue equals marginal cost (MR = MC). If the marginal costs to the
company are increased by 20 percent (ceteris paribus) without the price of the
product (marginal revenue is equal to price in this case) increasing it will result
in a lower quantity of goods being produced – as can be illustrated in Figures 1
and 2 (Price on the Y axis and Quantity on the Y axis):
Figure 1: Profit Maximising Equilibrium at Initial Marginal Cost Level
Figure 2: Profit Maximising Equilibrium at Increased (20 percent)
Marginal Cost Level
Figure 1 illustrates that a company will produce goods until the marginal cost
(MC) = Marginal Revenue (MR) (in Figure 1, this occurs when seven units are
produced). The rationale is that at this point the difference between the average
cost (AC) and average revenue (AR = MR since MR is constant) is maximised,
resulting in the highest profits. After the marginal cost function is increased by 20
percent, the new profit maximising level of production is six units. The two most
important features in Figure 2 are that the profit maximising level of production
has decreased and the distance between the average cost and average revenue
(since MR = AR) curves have decreased at the equilibrium point. This means that
the effect of the increased marginal costs is a lower production level and a lower
average profit (which will result in a lower total profit). If the increase in the cost
of doing business is large enough, no level of production will yield a profit.
It should be clear that an increase in costs without an associated increase in
productivity can have a disastrous effect on the profitability of a company. The
marginal cost of a product is defined as the additional cost incurred in creating
that product. Therefore a doubling of wages will have no effect on the marginal
cost if the produced quantity is doubled as well. This suggests that the answer to
the question of: ‘How can we increase pay and improve productivity?’ would be
the implementation of a short term incentive scheme (STI scheme) which is linked
to a clear, quantitative and reliable set of performance. In South Africa, the STI
schemes tend to form a larger part of the total remuneration of an employee as
their job grades move up in (as illustrated in Table 1):
Table 1: Short Term Incentive as a Percentage of TGP by Grade (Median)
Table 1 shows that at the median, STI as a percentage of total guaranteed
package (TGP) displays an increasing trend as the job level increases. If
higher-value, well-managed and independently-evaluated STI schemes could be
equitably rolled out at the lower grades in the South African economy, this could
result in a win-win situation for labour and business. As a result of increased
productivity triggering higher remuneration pay outs (STI scheme), labour would
receive higher salaries. On the other hand, the increased productivity would help
to nullify the impact of higher salaries on the marginal cost of producing goods
and therefore the profit maximisation equilibrium of the firm would not as
heavily affected.
The South African labour market is pushing for higher salaries. Employers are
resisting because of the impact this has on their competitive position. STI
schemes have the potential to give both parties what they want by linking
increases in pay to conditions that target levels of productivity. Such a scheme
would only work if all parties involved accept the conditions. Therefore great
care should be taken when setting up the performance management policy. If
all parties believe the metrics are clearly identified, fair and can be objectively
measured, then such a policy could result in a situation where both parties win.
Written by:
Bryden Morton, B.Com (Hons) Economics, Data Manager
Chris Blair, B.Sc Engineering, MBA – Leadership & Sustainability, CEO –
About Chris Blair
Chris Blair, chief executive officer of 21st Century Pay Solutions Group (Pty) Ltd,
has consulted to over 500 organisations – both in Southern Africa and
internationally. Chris holds a BSC Chem. Eng. and MBA in Leadership &
Sustainability and is registered as a Chartered Human Resource (CHR)
Practitioner with the South African Board for Personnel Practice (SABPP).
He is also accredited as a Master Reward Specialist through the South African
Reward Association (SARA). Areas of specialisation include incentive schemes,
cost benefit analysis, financial modelling, breakeven analysis, feasibility studies
and many more. He is considered to be one of South Africa’s leading experts in
share scheme design for both listed and unlisted companies. Chris has published
numerous articles on remuneration and he has appeared in the press for expert
views on the subject. He also serves on numerous boards such as: Council
member of Cape Peninsular University of Technology, Huguenot College.
Paterson Grade
STI as % of TGP
A1
6%
A2
5%
A3
6%
B1
6%
B2
6%
B3
7%
BU
7%
C1
9%
C2
10%
C3
10%
CU
11%
D1
9%
D2
14%
D3
13%
DU
21%
EL
25%
EU
38%
FL
55%
FU
62%
1
R ,20
AC
MC
MR
R ,18
R ,16
R ,14
R ,12
R ,201
R ,8
R ,6
R ,4
2
3
4
5
6
7
8
9
P
Q
1
R ,20
AC
MC
MR
R ,18
R ,16
R ,14
R ,12
R ,201
R ,8
R ,6
R ,4
2
3
4
5
6
7
8
9
P
Q
Nex Media •
Vol 3 Issue 2
33
