EDITORIAL COMMENT: Salary: What matters is the bottom line

Allowances have assumed an importance in labour negotiations that they do not deserve and yesterday’s Supreme Court ruling should have no effect on workers pay or pay deals; what matters is the total pay. For almost every worker, regardless of position, the critical number on the pay slip is the total pay, regardless of whether this is made up of salary and a long list of allowances or is just the salary.

Given an option of $500 a month salary with $1 000 a month allowances or $2 000 salary with no allowances everyone would choose the second option.

For decades, allowances were non-existent or minute. They came to the fore during the 1970s and early 1980s as a way of avoiding tax. Then the Government stepped in and made them taxable earnings. So the benefit disappeared. However, they had by that stage become entrenched.

There were other reasons to retain them, rather than consolidating them into basic pay.

One good reason, for fixed allowances, was to narrow some appalling wage gaps that were inherited from the colonial era. If everyone in an organisation, from the assistant tea maker to the managing director, gets an extra $50 a month then this narrows percentage wage gaps. It might be a large percentage increase for the lowest paid, but trivial for the CEO, but the actual gaps are preserved while inequality is reduced.

Similar arguments applied as inflation started rising in the 1990s, but most companies did not see similar rises in cash flows. Fixed allowances could keep starvation at bay for those at the bottom of the ladder while still retaining the nominal gaps in total pay; when the amount available for the pay roll was limited this system did make some sense.

A second reason was to pay a bit more to those who had generally accepted higher expenses. Educational allowances fall into this category, being payable only to those with school-going children. It is a way of tweaking who gets what from the total wage bill.

A more dubious reason was to lower contributions to pension funds, most pension schemes only seeing deductions from basic pay, not total pay. Younger workers tended to go along with this, since it boosted their present take-home pay although a day of reckoning would one day occur, as they hit 65.

Another dubious reason was, as has become apparent recently, to hide the total earnings of senior management. But that reason again falls away as investigations now centre on total earnings, not just basic pay.

So as the Supreme Court noted, some organisations might have good reasons to split earnings into basic pay and allowances and some might find consolidating them all into salaries a better option.

What individuals negotiating a contract of employment obviously need to concentrate on is the total pay, regardless of how this is split into basic pay and allowances, or even if it is split at all.

When unions and workers committees enter collective bargaining they still need to concentrate on total pay, but can look at arguments over whether splitting the total into salary and allowances makes sense and if so what makes the most sense.

Conciliators and arbitrators have a more onerous job than some assume. They need to look at a lot of factors, starting with what an organisation can afford for its total wage bill, the degree of pay differentials that exist and are desired and what would be the most fair way of distributing the total wage bill.

In the end they too have to look at what each group of workers actually earns in total, but for a number of reasons they may decide that splitting these totals into salary and allowances could make sense, or decide that this is unnecessary.

Workers and unions need to press for the highest possible pay. That makes sense. But arguing over the mechanics, rather than the totals, can be a waste of time.

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