Controversy over pay rises for heads of state-owned companies

A rush by bosses of state-owned companies in Latvia to award themselves large salary increases has caused controversy. Changes in the law allowed chief executives and board members of state-owned companies to claim a separate salary for each role they perform. Details of the pay rises were revealed in the press in January 2013, leading to a government review of the legislation. Most increases have been reversed, and a new method of calculating pay for key executives introduced.

Background

Discussion about increasing salaries in state administration institutions in Latvia began in November 2012, when Elita Dreimane, Director of the State Chancellery (VK), said it was unacceptable for high-ranking state officials to receive lower salaries than their counterparts in the private sector. In her opinion, there should be a way of increasing salaries for public sector workers in order to attract the best qualified employees.

Latvian law gives the state administration three ways of rewarding its staff; bonuses, monetary awards and additional payments. A bonus is an acknowledgement of a worker’s annual contribution, and the amount of the bonus is determined by the institution’s management. Monetary awards are granted for exceptional achievements. Additional payments are granted for any increased workload or overtime work.

In 2008, the then Prime Minister, Ivars Godmanis, banned the payment of bonuses to public sector workers, but monetary awards and additional payments were allowed. During the early years of the economic crisis, these options were rarely used because of the acute shortage of government funds.

In February, 2013 VK introduced a new initiative outlined criteria for determining whether public sector employees should be awarded bonuses. It suggested that every part of an employee’s job description should be linked to the overall goals and objectives of the institution.

Rises at state-owned stock companies

State-owned stock companies also said they wanted to make up for the fall in salaries caused by the economic crisis. New laws were approved by government officials to allow large state-owned companies to increase management salaries.

In November 2012, the government approved changes to rules governing the size of state and local government boards and the remuneration of board members, representatives of local government stock holders and responsible officials. The rules apply in state enterprises with a turnover exceeding LVL 40 million (€56.7 million as at 25 March 2013). The changes also allowed additional remuneration for board members taking on other roles within the same enterprise.

As a result, the chief executives in several major state-owned enterprises, including Latvian Railway (LDz), electricity supplier Latvenergo, and Latvia’s State Forest (LVM), were awarded big salary rises. In some cases salaries virtually tripled, from LVL 2,800 (€3,975) per month in 2012 to LVL 8,000 (€11,360) per month.

The rises were justified on the basis that a chief executive’s function can now be divided into its component parts, with a full salary being received for each part. The new rules also mean several positions in a single enterprise can be combined, or a person can assume official positions in several state-owned stock companies.

Latvia’s Cabinet of Ministers say their intention was to prevent professionals moving to the private sector. The Ministry of Transport has been especially active in preparing a comparative survey on chief executives’ salaries in other EU countries.

Public reaction and concerns

When details of the salary rises emerged in the press there were calls for an investigation. The size of the increases was criticised by Latvia’s Prime Minister, Valdis Dombrovskis, and the country’s President, Andris Bērziņš.

In order to tackle the situation, in January 2013 Latvia’s parliament, the Saeima, backed a new method of determining board members’ pay rises in state and local government stock companies, by raising the maximum coefficient for calculating salaries from six to 10. It said the salary of board members in state and local government stock companies should be calculated by multiplying this coefficient by the previous year’s average salary as published by the Central Statistical Bureau of Latvia (CSP).

According to the Ministry of Finance, in 2012 the average monthly salary in Latvia was LVL 478, (€679). This meant salaries in state stock companies would be capped at a maximum monthly level of LVL 4,780 (€6,790).

The Ministry of Economics and Ministry of Agriculture reacted immediately by lowering salaries in their enterprises, Latvenergo and LVM. Officials at the Ministry of Transport and Communication refused to reverse the salary rises for companies in its sector. On 15 January 2013, the Minister of Transport and Communication, Aivis Ronis, resigned and the reason given was disagreement about LDz salaries. However, on 23 January 2013, the salary of the chief executive of LDz was also brought in line with the levels set by the amended regulations of the Cabinet of Ministers.

Commentary

Premier Dombrovskis and government ministers are seeking to avoid responsibility for these huge salary increases in state-owned stock companies by shifting the responsibility to state secretaries. They, in turn, seek to exonerate themselves by pointing out that the salary structure was public knowledge. If the details of the salary increases had not come to the attention of the press, the rises would have come into effect straight away. Despite the financial constraints imposed on the whole country in the wake of the economic crisis, the public, social partners, and the chief executives of other state enterprises reacted relatively calmly to the disproportionate salary increases in some state-owned stock companies.

However, tensions in the public sector continue to increase along with what is seen as unequal compensation for the decrease in salaries caused by the economic crisis.

Raita Karnite, EPC, Ltd.

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