KEY POINTS:
An increase in the pay packets of public servants is enabling government departments to pinch key staff away from private businesses and exacerbating an already critical skill shortage, says Alasdair Thompson, chief executive of the Employers and Manufacturers Association (EMA).
"It handicaps the private sector growing exports, growing their business, growing the economy and, therefore, growing the productivity and wealth of the nation so that everybody can ultimately have higher pay rates," Thompson says.
Public pay rates increased by a full 5 per cent for the year to last September compared with just 3.5 per cent for the private sector.
"You could say the public sector has monopolised for themselves the rewards of our increase in GDP and everybody else is just getting compensated for a little bit more than inflation," he says.
And it's not just the salaries which are growing. The number of servants on the public purse is also swelling. The State Services Commission says the headcount for the public sector rose to 324,086 as of June 30 last year.
"It's a huge cost to the taxpayer for stuff-all value," Thompson says.
Granted some of the increased government spending has gone into health and education but there has been a fair bit of spending in government departments on advisers, planners, analysts and facilitators.
And it's not just the higher number of jobs but the number of jobs with quite high salaries.
The largest is the chief executive of the Ministry of Social Development, Peter Hughes.
He receives almost $500,000 every year, according to the State Services Commission.
There is also no shortage of government jobs advertised each week whose pay is simply categorised as "$80,000 to max".
"That in itself is creating a shortage of really competent people in the private sector," says Thompson.
"People are attracted to the public sector because the public sector pays a heck of a lot more because it's got an endless supply of taxpayers' money.
"In fact, it is an oversupply of taxpayers' money ... it doesn't have any constraints on what it offers people.
"It just buys people for whatever it needs."
Statistics New Zealand's quarterly employment survey for last September shows the disparity.
The average hourly earnings in the public sector was $28.97 per hour while the private sector sat at $21.59 an hour - $7.38 per hour less or an entire 34 per cent below public pay rates.
"The public sector has the advantage of endless taxpayer over-funding. They've got a huge surplus and it's no trouble ... to just spend more money, so they do," Thompson says.
But the actual disparity between public and private pay could be even larger if you take into account state-owned enterprises. Electricity, gas and water are some of the highest-paying industries but are counted as being in the private sector even though they are largely owned by the Government.
Thompson says higher public salaries are hurting private businesses.
"Every year, the public sector pays more. That's putting a big strain on the private sector in particular who are losing staff to the public sector."
The cost of higher salaries, increased holiday pay, more paid leave, KiwiSaver, the high dollar, the credit crunch and a looming economic downturn have all whirled together to create a perfect storm for local businesses fighting for their survival.
"I don't think the Government intends to be anti-business but because it is a government made up primarily of former school teachers, former academics and former union representatives, it doesn't have a feel for business," Thompson says.
Jarrod Moyle, manager of Reward Practice at Sheffield, said his private-sector clients would like to be able to offer higher salaries but could not compete with government on price.
"People are being poached, recruited from their organisations into public-sector organisations which in the past they wouldn't have seen happen," Moyle says.
Private companies are battling for talented staff against the very Government they help to fund, Moyle says.
He says small- and medium-size business simply can't compete against a Government sitting on a taxpayer budget surplus of $8.7 billion (for the year ending June). "The public-sector pay for chief executives has actually been increasing at a faster rate than the private sector in terms of base salary," Moyle says.
Sheffield Reward Consulting conducts the largest annual survey of chief executive remuneration.
It found the median total salary package of a public sector CEO was $255,000 versus $248,291 in the private sector.
Traditionally, this has not been the case. Public servants have generally been paid less than private-sector employees.
"With public-sector entities, often the stated or the recorded policy of where they want to position their remuneration is about 10 per cent below the market," Moyle says.
But in reality that simply is no longer true.
"The public sector has had to up their game a little in order to attract the right sort of people. In many roles, you won't see much distinction between the private and public sectors in terms of remuneration."
Moyle says the other issue is performance. Most public-sector workers receive the same amount of pay regardless of their performance, whereas most private-sector pay is based on achieving something.
Bonuses and incentives for private-sector workers bring their total remuneration up to around the level of most public servants, Moyle says. But he believes the public sector should have some pay dependant on performance as it is in the private sector.
"The public sector in New Zealand and the small-to-medium businesses are well behind the rest of the world in the use of performance pay."
Sheffield research from 2003 found New Zealand ranked below China in terms of the use of performance based pay for executives. Some 18 per cent of Chinese executive pay packets were performance based, while only 15 per cent of New Zealand remuneration was. As of 2005, China had dramatically increased its percentage to 56 per cent. New Zealand has only managed a one per cent increase and in 2006 still showed just 16 per cent of executive pay packets based on performance.
But some people don't see the recent increases in public pay as leaping ahead of the private sector.
John McGill is the Auckland chairman of remuneration specialist company Strategic Pay and advises government departments on how much they should pay staff. He says the public sector is just catching up.
"Traditionally, the private-sector movements were a little bit higher than the public sector. This is just a correction. In a tight labour market, the salaries will tend to converge."
McGill sees the current environment as a closing of the gap between private- and public-sector pay.
The real talent war is being conducted at the lower levels - receptionists, entry-level positions and general office staff. Public-sector salaries at the lower levels are not far behind those of private business, he says.
"It would be around between 5 per cent to maybe 10 per cent for a lot of straightforward entry-level type positions. For larger jobs, the gap does get very big," McGill says.
But for chief executives making $250,000 a year, the gap of an extra $50,000 - $100,000 a year is not a major lifestyle change, McGill says.
For senior roles, private salaries are 30 per cent or more higher than public roles.
"I don't think the public sector wants to be a price leader. It does want to be price sensitive," McGill says.
The Government was once able to tout public sector roles to potential public servants by focusing on the nature of the role, the seriousness of the responsibilities or the potential career opportunities.
But in today's market, cash seems to be the Government's recruitment tool of choice.
"Throwing huge sums of money at the problem, if you see it as a problem, will not necessarily solve it. But they do have to be sensitive to pay."
McGill says government departments have to be sensitive to the way they are attracting workers and, in the current market, that is a difficult balancing act.
But members of the EMA have been expressing their frustration as government departments actively headhunt worker after worker from private businesses.
Thompson says the Government simply has not come to grips with the detrimental effect its recruitment practices are having on private industry. He says it doesn't think twice about pinching key staff away from private companies.
"I don't think they think. I don't think anybody's thought, 'Hey, I wonder what would happen if we tried to slim down the size of the public service and release people into the private productive sector?' "
There are also different personality types among people who are drawn into the public sector versus private.
Thompson says the public sector tends to attract people looking for comfortable positions where the accountability is nowhere near as stringent as in the private sector.
"I think most of the people who work in the private sector understand about performance and making sure there is enough money coming from sales - unless that happens, they can't get paid or they won't have a job. I don't think that occurs to people who work in the public sector too much."
Contact David Maida at: www.davidmaida.com
Reference
* www.stats.govt.nz/NR/rdonlyres/ACA0B098-8D75-406E-9754-1C6B90EAA7B0/0/quarterlyemploymentsurveysep07qtrhotp.pdf
* www.ssc.govt.nz/display/document.asp?docid=6254&pageno=3
