Tim Hazledine: Exorbitant salaries need to be reined in

MPs' salaries are symptomatic of the growth in pay of people at the top of the income distribution in both public and private sectors. Photo / Mark Mitchell

Pity our poor Prime Minister - powerless to have his way even on the rather minor matter of salaries for Members of Parliament. Mr Key says that "if it was my vote, it would be no pay increases [for MPs], but I don't get that vote".

I've heard this before. I once taxed a particularly well-fed former Labour Cabinet minister on the inflation of MPs' salaries. He angrily retorted that it was nothing to do with them - entirely out of Parliament's hands. Yet, when, in 2009, at the trough of the recession, MPs - to their credit - called for a zero pay increase, the authority did respect their wishes. Of course Parliament could cut its own salaries if it really wanted to.

Why should it? The annual base salary for an MP is $144,600 - less than many university professors get. But think of it this way. Unlike university professors, who get their positions only through a rigorous and objective performance evaluation, the selection of politicians is not so clear-cut.

We can check off items on their resume, but we can't read their minds - we can't know how sincere are their protestations of being purely motivated by the public good, which is what we want from our parliamentarians.

Given that a salary of $144,600 puts its recipient well into the top 5 per cent of income earners in NZ, and that this salary is likely to be more than probably most MPs - especially those currently on the opposition benches - ever have and ever could earn out of Parliament, might we not justifiably worry that more mercenary motives might be moving people to put their names in the electoral hat and, especially, to stay in the game once elected, regardless of actual performance?

Actually, I am personally not too fussed about the inflation in MPs' salaries (they used to earn as much as university senior lecturers, not professors). But it is symptomatic of something that really is important, which is the growth - you could almost say explosion - in the remuneration of people at the top of the income distribution in both public and private sectors, and the accompanying managerial bloat.

Let's take the figure of $200,000 as the top-pay starting point. In 1995, the equivalent of this was $110,000. That year, just 21 university employees - including the seven vice-chancellors and 10 professors in the University of Otago Medical School - earned base salaries of $110,000 or more.

Now, the 2013 annual report of the State Services Commission contains data which reveal that in 2012, for the first time, the total salary bill for employees in the tertiary sector (universities and polytechnics) on salaries of more than $200,000 a year exceeded $100 million. It was about $103 million, up 14 per cent from the year before.

A few of these high-paid employees will be star professors, but most are "men [and women] in suits" - occupying managerial positions which either didn't exist at all 20 or so years ago, or which were much less highly paid, even allowing for inflation. And these top managers all have to be serviced by junior managers, executive assistants, secretaries and so on - none of them carrying out the actual teaching and research that is the real job of the university.

The problem is widespread. There was much anger and angst in the Herald letters page at the news that the chap in charge of Auckland's waterworks received a $70,000 pay increase to bring him up to $780,000 a year. The mayor - his mind perhaps on other things - airily justified this as "meeting the market".

But that's a fallacy. Because it is literally impossible to determine how much value these managers create, there is no properly functioning "market" for chief executives and their ilk. So it's all done by "benchmarking" their pay increases to increases granted to other people like them. In 2003, the head of the State Services Commission - who sets most civil service chief executive salaries - worried that the benchmarking process was "becoming circular". But he carried on doing it regardless.

Actually, a better word than circular would be "spiral" - an ever-upward spiral of follow-the-leader. We could break this spiral. Ask two questions. First, what would be the salary now of department heads, vice-chancellors, etc if the salaries paid for these jobs in 1995 had increased just at the rate of average wages. The answer - being generous - is about $400,000. Second question: are the people doing the jobs now any smarter or harder working than their predecessors? Answer: no.

I'd like to be able to vote for a political party that would commit to winding back top pay in the public sector to $400,000, with appropriate downward adjustments, of course, to everyone underneath the top level. This would save hundreds of millions of taxpayer dollars, which could easily fund paying the cleaners and others the Living Wage, with a bit left over for school lunches or some other worthy cause.

Tim Hazledine is a professor at the University of Auckland Business School. He notes that his and other academics' salaries have risen since 1995 at about the same rate as average salaries in New Zealand as a whole, which is fair enough.