By Mark Maciolek*
Before Christmas, The Dominion Post asked why public sector pay “hardly ever come[s] down” and whether it has to follow international and corporate trends.
It is a reasonable concern, especially for taxpayers who ultimately foot the salary, but is it as simple as the numbers suggest? The Value of Bosses discussion paper written late last year by Edward Lazear, Kathryn Shaw and Christopher Stanton found the value of an average manager is sizeably greater than any employee.
What this illustrates is that when discussing remuneration it is not a debate about the figures themselves, it is all about person’s productivity. Economically it is about measuring how many units of output you get for each unit of input, be it a worker’s time and skill, the technology they use, and the environment they work in, for example.
Lazear’s paper illustrates that a natural selection process takes place in the private and public arena. Bosses in the bottom tenth of the quality distribution are twice as likely to leave. If they are replaced by those in the 90th percentile productivity increases by about one employee per nine person team.
Let’s take a theoretical approach and apply it closer to home. New Zealand has around 300,000 public servants with about 1,160 of those in upper management, according to the State Services Commission. So,the average manager will be in charge of approximately 259 people.
If all bosses were classed as poor quality and were replaced with top quality, then productivity would improve by as much as hiring an additional 33,600 workers. That’s over 10% of all government employees today. A staggering amount.
Last year one tenth of all public servants, including about 116 permanent managers, left because of resignations, retirements and dismissals. If those managers were all top quality and replaced by bottom quality it would represent a productivity loss of approximately 3,400 people.
The empirical evidence indicates we need to worry about quality retention in the public sector for it to remain productive. To overcome this we must pay for excellence. To be paid well, a manager must excel, but it is a two way relationship. Incentivise to encourage over-performance, and dismiss for poor results, just like the private sector.
On the face of it, government pay packets might look disturbing. Outgoing Green Party co-leader Russel Norman has called for stricter performance standards. Yes, performance standards should be met to justify pay, but what we really need is a robust way of assessing the quality of management.
It should be just as easy to remove a poor quality manager in the public sector as it is in the private sector.
There are three major narratives to take away from the Lazear paper. We need to create robust mechanisms to ensure top quality performance from state executives. We need to see the same action taken to remove poor quality bosses in the public sector as we see in the private sector. We need to retain, recognise and incentivise good bosses and good employees because “the effect of good bosses on high quality workers is greater than the effect of good bosses on lower quality workers”.
First, public sector management should be scrutinised on quality and performance. How much we pay them should really be ancillary.
Hand in hand with this though we must have an evaluation of whether public sector outputs are really worth the money. The worst possible outcome would be to have high public sector pay draw great workers from the private sector to provide services that the public does not value.
*Mark Maciolek is an intern at The New Zealand Initiative. Mark is from Perth and is completing his internship through Mannkal Economic Education Foundation. This is the weekly column the NZ Initiative writes for interest.co.nz.