Inequality: why HR (and governments) should worry about and act on it

Fair and equitable pay?

‘How can we create a more equitable, compassionate approach to reward and people management more generally after this Crisis?’ questioned one highly experienced member of my hastily-formed, Rewards after the Pandemic Group at our first online meeting, all locked down in our attics and spare rooms in mid-2020.

Equity and fairness, in pay and rewards, employment and life (as my two wonderful girls regularly point out to me), still really matter to people. As the brilliant Frans de Waal illustrated perfectly in his famous experiments with Capuchin monkeys, we are all fine with watery cucumber as a reward for doing a basic task when that’s what all us monkey gets. But it definitely is not fine when the monkey next to you gets sweet nutritious grapes for doing the same work. ‘That’s not fair!’ … as my girls, as well as the offended monkey, would express it.

However, four years on and our RAPG charter for fairer reward structures is, I have to confess, looking decidedly idealistic, as we return somewhat bumpily to a comparatively, more normal context. Today’s annual review of the remuneration of the leaders of FTSE 100 companies from the excellent High Pay Centre shows that the mean remuneration of the CEOs of Britain’s biggest companies increased from £4.42 million to £4.98 million last year – a level not seen since 2017 and representing a cool 12.2% increase.

That extra £500k could alternatively have funded 495 of their low-paid employees on the national minimum to move up to the level of the Living Wage Foundation’s costs-calculated real living wage.

But for the rest of us, generally the picture looks less rosy. In the continuingly low-growth UK economy we only just returned 18 months ago to real pay growth (ie pay increasing faster than price inflation) and only recently achieved levels of real pay for average-earning employees last seen in 2005 (representing probably the worst decade for general employee pay for more than 200 years).

The CIPD’s quarterly Labour Market Outlook, also published his morning found, in its survey of 2000 of them that ‘employers expect to hand out the smallest pay rises in two years’. The CIPD’s new study shows that private sector pay deals are forecast to fall from 4% to 3% over the next year, the lowest level since 2022, and from 3.0% to 2.5% in the public sector.

Average earnings last year did in fact increase by some 6% to £34,903. But the median FTSE 100 CEO is now paid 120 times the median UK full time worker, up from108:1 in 2021. 20 years ago the ratio was closer to 50:1, partly explaining why the government introduced legislation in 2018 requiring large companies to publish this ratio each year in their annual report and accounts.

But does showing people they are paid so much more than their leaders in employment and society really help anything or anyone? The HPC’s tracker for example, showing how fast CEO’s earn their money – this year they passed the level of average earnings on January 4th - makes great headlines and get the message of inequality across to people. But is also normalises it and perhaps helps to explain why HR leaders and Rem Co chairs seem impervious to these charges of inequality, unfairness, self-interest and greed.

But in its survey of a representative sample of more than 1,000 UK employees, The View from Below, the CIPD found that

-          Nearly half of employees (44%) feel their CEO’s pay is either far too high or too high.

-          71% agree that CEO pay levels in the UK are generally too high (while only 5% disagree)

-          64% disagree that CEO pay levels in the UK inspire employees to work hard ( 8% agree);

-          54% agree that CEO pay levels in the UK are bad for an organisation’s reputation (11% disagree).

72% of employees would therefore like to see more pay transparency within their organisations, and as I have written in earlier blogs, globally governments are giving employers no choice on telling us all more about how they pay and employ their staff. Who’s getting the grapes and how juicy are they?

Government action

Last week’s riots in the UK and some of the criminality and violence that formed part of them clearly can have no justification whatsoever. But as the Labour and Co-operative Party MP for Walthamstow Stella Creasey noted after the National Panel on Riots  reported on the similar wave of protests and violence in 2011, government should ask ‘not only how to stop social disorder but also how to promote social justice’, when ‘the list of areas affected reads like a roll-call of poverty – Brixton, Croydon, Hackney, Peckham’.

A month into the new Labour government, and alongside of a raft of measures to strengthen equality legislation, including ethnicity and disability pay gap reporting, the Labour party’s emphasis clearly seems to be on national economic growth as the primary means of addressing low pay and income inequality.

The party’s manifesto described growth of the UK economy as their ‘single defining mission’, and they have a suite of pro-growth policies already in process now as part of their new ‘industrial strategy’, including planning reforms, housebuilding and government investment in green technologies. The words ‘economic growth’ appeared 49 times in their manifesto. By contrast addressing ‘inequality’ received only one mention.

Their philosophy appears so far to be one of ‘growing the (national economy) pie’, rather than worrying about the size of the slices (to use Alex Edmans analogy), or who has the grapes of what variety. (Although there has been no equivalent as yet of Peter (now Lord) Mandelson’s famous (and much disputed) declaration as business minister under Tony Blair that he was ‘intensely relaxed’ with people being ‘filthy rich’ ).

More radical policies originally considered, such as mandatory ‘fair pay agreements’, have either apparently been dropped, (at least for now) or put on a longer-term development and testing timeframe. The government’s FPA for care workers, a first of its kind in the UK, is scheduled to be included in the forthcoming Employment Rights Bill, intended to serve as a ‘proof of concept’ before the model can then replicated in other low-paid sectors.  

Part of problem with acting to address inequality is that national definitions and international comparisons of it are, as Chris Giles points out in this excellent podcast on The Economics Show, something of a quagmire. Are we talking about income or wealth for example, with the latter contributing more to the undoubtedly significant growth we have seen in the number of the world’s billionaires in recent years. Oxfam reports that the richest 1% have taken two-thirds of all new wealth generated since the pandemic struck in 2020, which itself had a major impact in the UK in widening existing wealth and health inequalities.

Everyone knows that inequality in America in particular, but other major economies such as France too, has risen a lot over the past few decades, largely thanks to the work of Thomas Piketty in his bestseller, Capital in the Twenty-First Century. But a recent research paper by Gerald Auten and David Splinter uses the data differently to argue convincingly that US inequality did not rise by as much as Piketty claims.

Similarly, as the previous UK government was keen to point out, the major international comparative measure of inequality, the Gini coefficient, has stayed relatively flat in the UK over the past two decades, although it has risen by 1% to 2% since 2020.

In the UK context two findings on inequality do however, seem relatively undisputed:

-          First, the UK has moved in recent decades to closer to US levels of wealth inequality and is above equivalent averages in Europe. Summing up the evidence, a House of Commons research paper from earlier this year concluded that’ Inequality in household incomes in the UK has remained at a roughly similar level since the early 1990s, but is higher than during the 1960s and 1970s. While the share of income going to the top 1% of individuals by household income increased during the 1990s and 2000s… inequality overall was fairly stable during this period’.

But ‘OECD figures suggest that the UK has among the highest levels of income inequality in the European Union (as measured by the Gini coefficient), although income inequality is slightly lower than in the United States’.

-          Second, high inequality is associated with a variety of negative social consequences. This was originally highlighted by Kate Wilkinson and Richard Picket in their best-selling research published in The Spirt Level, where they illustrate 11 different health and social problems, ranging from physical health and mental health, drug abuse, educational outcomes and imprisonment rates through to obesity levels, social mobility and teenage pregnancies are significantly worse in more unequal rich countries.

According to a report commissioned by the richest G20 nations earlier this year, a minimum tax globally on billionaires of 2% could raise $250 billion that could be used in order to address common issues such as excessive rates of public debt and increasing rates of child poverty. In the US, President Biden proposed a 25% tax on those with wealth of more than $100m, calculating that it would raise $500bn over 10 years to help fund benefits such as childcare and paid parental leave that were originally proposed in his Inflation Reduction Act.

65.8% of San Francisco voters (and employees) approved a new tax in 2020 which levies an extra tax on revenues for companies which exceed a CEO: employee pay ratio in excess of 100 times. The rate increases by 0.1% for every additional 100 times growth in the pay ratio. How would employees in your company vote faced with a similar referendum?!

It was the previous as well as the current government that agreed on the need to reform the so-called ‘non-dom regime’ for wealthy expatriates and reduce their tax breaks in the UK. And having announced the removal of the winter fuel allowance benefit for wealthier pensioners, some commentators speculate that Chancellor Rachel Reeves is seriously considering wealth tax rises, possibly increasing the rate paid on capital gains and the tax on inherited wealth.

A number of ministers and MPs also advocate corporate governance reforms alongside of the forthcoming trade union legislation, in order to encourage a wider diversity of corporate forms and structures, in support of wider stakeholder and greater employee involvement, including more employee-owned companies and co-operatives.

Growth is already evident over the past four years, with the numbers of employee-owned businesses (EOBs) doubling to more than 1,000 recorded by the Employee Ownership Association. The EOA’s recent survey of them found that 96% say that looking after and caring for their workforce is a key measure of business success. The results? The EOA’s Top 50 Employee-Owned Business index continues to out-perform the rest of UK business in terms of productivity, at between two and three times the national average. Would that the rest of the UK PLC-dominant landscape could do likewise and our national productivity problem would be solved!

But what can and should HR and reward leaders be doing on pay inequality in their own organisations?

HR Actions

The High Pay Centre found that FTSE 100 companies spent £755 million last year on their top executives’ remuneration, enough to increase the pay of 690,000 of the estimated 4 million UK employees who are in poverty earning less than a real living wage up to that level. The High Pay Centre supports a more modest re-distribution from the highest to the lowest earners. A 10% redistribution from those earning more than £300,000 a year (the top 0.25%), for example, could fund a pay rise of £40 a month to the lowest paid 25% of the income scale. But even this looks politically unfeasible and practically impossible in most employers at the moment and in our current political and economic context.

So what can HR leaders do? Executive pay and governance reforms along the lines outlined by bodies such as the Purposeful Company and High Pay Centre certainly are feasible, practical and desirable. I have outlined some of the key components of these already in earlier blogs. These include: less emphasis on short-term cash bonuses and moving towards more genuinely long-term incentivisation; adopting more broadly-based performance-related rewards enfranchising all employees, not just executives; making the Rem Co a wider people and employee-rewards-responsible committee; and measuring and working to lower your internal pay differentials.

I would also suggest practical and speedy action in four additional areas.

1.      Adopt a fair pay strategy

Rather than being required to develop such strategies, smart employers already have a clearly defined and stakeholder-communicated reward strategy incorporating definitions and deliverables on fairness and fair pay, essentially outlining what you believe, what ‘good’ means, for pay and rewards in the organisation. Are you a Goldman Sachs or a John Lewis for example, in terms of your approach to internal pay relativities and pay for performance? Do you pay ‘as cost efficiently as possible’, or ‘as much as we can afford’ (principlaes drawn from the reward strategies of two companies I know)?

Our Rewards Charter sets out a checklist of questions to address to help you define the key elements of your reward approach and principles.

Leading companies are already publishing examples that you can review to help in developing your own strategy, including Shell which has moved to a policy of paying a minimum real living wage globally, and Unilever, which is also doing this across its supply chain.

But the key of course is then to see that you are delivering these principles into practice, and that you are seen to be.

2.      Be as transparent as possible on pay

A likely difference between Capuchin monkeys and employees in their perceptions of reward fairness is that if you hide what and how other people are rewarded in the organisation, then they are not going to speculate as to how fairly they think they are being rewarded.

Many research studies indicate that if employees don’t know anything beyond the bare details of their own package then they will speculate, relying on informal sources, the web and the internal ‘grapevine’. And that generally seems to produce more negative than positive perceptions. After all, would you believe and trust that your employer pays fairly if you hadn’t a clue what anyone else earns nor how pay relativities are determined?

No wonder mandatory gender pay gap reporting information is such an important area that your potential new female recruits look up before deciding whether or not to work for you.

There has been a huge shift in the private sector over my career in terms of levels of pay transparency, with public sector-style openness evident in many companies 30 years ago having shifting now to the majority of employees getting no information beyond their own rewards. And worryingly now, unlike in the US and Europe, the trend appears to be continuing in the wrong direction.

The latest CIPD/ADP research published earlier in 2024  concludes that ‘Pay transparency is limited’. Only 41% of UK employers for example, share pay ranges in external job adverts, and fewer than half as many share specific salaries in internal job adverts. Only 54% of organisations check that their employees understand their pay, despite the finding that requests for information about pay have increased significantly in the last year. Beyond mandatory pay gap reporting, less than a third carried out equal pay audits in the past year and a only quarter of them voluntarily considered ethnicity pay gap analyses, despite the impending legislative requirement.

We need to see a similar shift back in practices towards openness and honesty on pay; and governments now are clearly driving this in order to further their social goals, such as gender and ethnic employment and pay equality. Recognising the confidentiality of individual’s personal data, we need to reverse the current, ‘as little as possible’ approach to pay and reward disclosure to both internal and external audiences, finding positive answers to common questions such as:

-          should we publish our pay ranges and grade structure? and

-          should we communicate reward information through employees’ mobile phones?

We need to inform and reassure employees on what the academics refer to as both ‘distributive justice’ ie how your pay stacks up against other peoples’; and ‘procedural justice’, that is how you ensure pay consistency and fairness through your job evaluation system, market pay studies, pay structures and so on.

I have written up more details on pay transparency legislation and the benefits of transparency in earlier blogs.

3.      Publish and manage your pay ratios

When I started out in rewards consulting, boards used to largely ignore the internal pay ratios and comments on fair pay that I always included in my executive remuneration reports. They have no choice but to both publish and consider that information now.

The measures aren’t perfect. We know for example, that because of the workforce structure, a big retailer is likely to have a fairly wide internal pay ratio but probably narrow gender pay gap compared to the pay ratios evident in professional service organisations or gender pay gaps in the airline industry. But the key questions as an employer you need to address, especially for your potential recruits and employees, are where are you, where do you want to be, how are you going to get there and how well are you progressing?

Most employers will want to remove their gender pay gaps completely, and I have a number of charity clients who have set and communicate a maximum internal pay ratio policy, as well private sector firms who specify they want to be, for example, in the lower quartile of ratios in their sector.

Many employers last year acted to support the difficult cost-of-living situation faced especially by their lower paid employees, skewing pay awards to the low paid and paying COL bonuses for example, and in many cases this also had a positive impact in reducing their internal pay ratio. Remember that the ratio can be reduced by increasing the average employee figure as well as controlling the high-paid one! Having effective policies and practices on progressing the pay and careers of low paid workers can also deliver, as IES research has shown, major benefits to your organisation in areas such as recruitment and retention rates, as well as often contributing to reducing internal ratios.

There are lots of great examples out there now that you can review in helping to set your own goals and approach to pay ratios, reporting on and closing them. UNICEF UK and the Children’s Society report on their pay gaps across a wide range of employee groupings and categories already, including ethnicity for example, in their annual pay gap report updates. Through sector-leading policies on gender equality and support they have both significantly reduced their gender pay gap in recent years.

4.      Share the gains of growth and success with all employees

Outside of countries such as France where provision is mandatory, fewer than 10% of European companies offer broadly-based profit sharing and share plans to their  employees, with most preferring the restricted US model of executive incentivisation, (although 22% of UK and European companies in one recent study were planning to provide an equity stake to more employees).

They are the smart ones, for their owners as well as their employees. I have written up the researched benefits of collective bonus plans, profit sharing and all-employee share schemes in other articles and blogs.

Last month both Rolls Royce and Tesco announced how their workers were benefitting from such broadly-based employee share schemes. At Tesco more than 20,000 colleagues shared in a £30m windfall share price gain available through saving in their SAYE approved share plan. Those who invested the maximum £500 a month into the share savings scheme will make a profit of almost £10,000 from the three-year scheme if they now opt to sell their shares.

Emma Taylor, Tesco’s  Chief People Officer, said: “This is just one of the many benefits available to our colleagues, and the strong performance of the schemes this year is a reflection of their hard work and the brilliant job that they do serving our customers every day.”

Leaders of Rolls-Royce meanwhile announced that they will give each of its employees £700 worth of shares in the Company, after reporting profits of £1.1 billion in the first half of 2024

Meanwhile, Tufan Erginbilgiç, CEO of the famous engineering firm, told employees that they would all receive a gift of £700 worth of shares next month:

“These results have been made possible thanks to your hard work and our collective actions. You are making the difference. It is therefore important that you share in our success," he wrote to employees.

The shares in Rolls-Royce are worth £30 million. 

Some employers have gone even further. Like the founders of John Lewis, Julian Richer at Richers Sounds has gifted their company to its employees through an Employee-owned Trust. And after examining the traditional ‘make us rich’ floatation route, the founders of adventure parks company Go Ape  Rebecca and Tristram Mayhew have done similarly, explaining that:                     “Covid coming straight after we had abandoned the private sale process was in some ways cathartic.. a real eureka moment…We realised these people who had enabled us to do so well up to that point we considered as employees were in fact much more like our family.”       FT,

‘Open our ears’

I am looking forward to going to the Wimbledon Bookfest later this year. Well-known journalist and former High Pay Centre head Stefan Stern  will be talking about his new book on ambition there. Stefan gave a powerful critique of the UK’s unequal  ‘high pay/low pay’ pay model in one of his recent articles, concluding that:

‘In global Britain, we have low pay for the masses, flat productivity, widespread economic inactivity and low morale. And the CEO’s solution? Pay us more’.

Stefan’s devastating analysis should shame us all into thought and action.

I am also very much looking forward to seeing Turkish exiled writer and activist Elif Shafak discussing her new novel There are Rivers in the Sky. Although best known for her novels, she wrote a great essay that helped to keep me going in the depths of lockdown, How to Stay Sane in an Age of Division.

‘As a novelist’ she writes in that, ‘I believe in the transformative power of stories, to bring people together and unlock our potential for empathy and wisdom’. Amidst the current ‘swirl of news – the inequalities, the injustices, the turning away from the path of diversity and inclusion – it is easy to feel the story we are living in is not the one we would have written’.

But we all must ‘open our ears to the vast, multiple belongings and stories the world has for us…. We have all the tools to build our societies anew, to fix the inequalities and end the discrimination – chose empathy over hatred, humanism over tribalism… we shouldn’t go back to the way things were before’.

So, what are you and your organisation going to talk about and start doing to improve pay fairness and equality from this week? Hopefully my four ideas and action areas will give you a start.