No free ride

The release of the Federal Government’s terms of reference for the Productivity Commission’s review into Australia’s workplace relations framework, highlighted three key points boards cannot afford to ignore, according to consultancy firm Egan Associates.

They are “fair and equitable pay”, “productivity, competitiveness and the business environment” and “the ability of business and the labour market to respond appropriately to changing economic conditions”.

On the issue of fair and equitable pay, Egan links slowing wage growth in Australia with modest recent and forecast increases in the fixed remuneration of executives. As a result, shareholders expect that while wages are depressed across the economy, growth in executive pay will be restrained if it occurs at all.

Linked to salary increases is the second issue of concern: productivity, competitiveness and the business environment.

Egan notes that in recent years, rising terms of trade have bolstered lacklustre productivity performance in Australia. However, as above trend growth ends, “the free wage ride also ceases”.

It argues that executives are not free from the obligation to increase productivity and says unlike the average worker, executives have the opportunity to lift capital productivity as well as labour productivity, with the onus now on executives to exert the discipline necessary to increase the productivity of all inputs.

Finally, on the ability of business and the labour market to respond appropriately to changing economic conditions, Egan notes that employers are increasingly calling for flexibility in workforce deployment so they can adjust employee numbers and hours as business requirements vary.

However, although executives are hired by individual agreement, their remuneration structure is not always responsive to changing economic conditions, Egan notes.

The easiest avenue to introduce flexibility is via adjustment to incentive plans, backed up when necessary by the exercise of board discretion.

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