Inequality is the “defining issue of our time”, said Barack Obama last year, in a speech echoing Theodore Roosevelt in 1910.
Last week’s news that FTSE 250 executive pay had grown by “only” 3 per cent over the past 12 months, despite the continuing premium over the rest of the workforce, was lauded by the business press as proof of the responsible attitude now being taken. Vince Cable’s impending reforms studiously avoid any idea of fixed pay caps or pay ratios, focusing instead on improved governance and disclosure, with a binding shareholder vote, and a single total pay number reported.
The debate on measures to address the long-term trend of growing pay inequality in this country has apparently been won by the free marketers, who argue that pay ratios between executives and the rest of the workforce reflect nothing other than the structure of different industries, and that their being tripled over the past decade has been essentially irrelevant to economic performance. Only Land Securities amongst FTSE 100 companies publishes its internal pay ratio in its annual report and accounts.
Which is why last week’s World Economy special report – in that clarion of free market liberalism for 150 years, The Economist – should be required reading for all remuneration committee chairs and reward professionals. Echoing recent research by the IMF, the report concludes that “inequality is the most pressing economic problem of the coming decade”. It says “bigger income gaps are likely to reduce both social mobility and future prosperity”, so that “it makes sense to reduce income disparities, whatever your attitudes to fairness”. Wow, read that again, those of you in the “irrelevant” camp.
The report, it is true, does draw a distinction between ‘good’ and bad’ pay inequality. The positive type was evident here during the Industrial Revolution and in China after Deng’s reforms in the 1980s, when entrepreneurs in poor rural economies exploited technological innovation and raised the rewards and living standards for themselves and their workers. The ‘bad’ reflects social and economic ‘cronyism’ and market failures, where powerful industrialists and politicians exploit their social position to deliver themselves massive fortunes at the expense of wider society, blocking wider education and income growth. Think Russian oligarchs and South American telecoms executives and drug barons.
Or think again. Because while income inequality has actually been falling in Latin America, it has been steadily increasing in the UK and the ‘Gatsby curve’, the inequality of opportunity (measured as the chances of your earning more than your parents) has been worsening. In Norway, where I was speaking last week and whose economy is the strongest performing in Europe at the moment, only 2 per cent of income inequality is explained by factors outside of your own control such as sex, race and parental occupation. In the UK it is over 20 per cent, worse than the US and China and just behind Guatemala.
The Economist‘s macro solutions are to boost competition, reform taxes and better target social security spending, especially on young unemployed people, and to improve state education, especially vocational. But what about at the organisational level?
Philip Brown and Anthony Hesketh’s research highlights that, for all HR’s talk of “talent management” in which: “Glossy corporate brochures present a future in challenging, exciting and financially rewarding jobs for the winners in the competition for fast track management appointments…convey an image of enlightened employers actively seeking to diversify their talent pool. (The reality is that) those leaving the world of mass higher education find themselves in a scramble for jobs with rising stakes for the winners and losers” and prevailing recruitment techniques favour those from upper class backgrounds with the required social skills. Corporate development spending once in the organisation is also heavily focused on those that already have, rather than the have-nots.
HR, whether in support of economic efficiency or social justice and fairness, or both, needs to set out its own manifesto of action on inequality, which might include measures to:
- give all staff the chance to share in the benefits of higher financial performance and profitability, not just executives, as at John Lewis;
- address low pay in their own organisations, moving to pay living wages and adopting Pret’s motto to “pay our staff as much as we are able, rather than as little as we can afford”;
- ensure staff are treated and paid fairly and without discrimination, bringing all staff, including executives, within the scope of effective salary management practices such as job evaluation and grading, and monitoring and auditing the pay and bonus outcomes from performance management assessments;
- be open and transparent on pay and its management in the organisation, including on internal pay relativities;
- oppose the current proposals by BIS to remove equality questionnaires as ‘red tape’;
- use their training spend to help to create improved equality of opportunity, for example, by supporting local schools, taking on apprentices and investing their own training budgets widely;
- be more open-minded in their recruitment approaches and sources, like the retailer who eschews formal qualifications and “recruits for attitude and trains for skill”.
In particular, HR needs to start living up to the terminology of talent management and fair pay.
According to Barack Obama in last week’s lively presidential debate, “Governor Romney doesn’t have a five-point plan. He has a one-point plan: and that plan is to make sure that the folks at the top play by a different set of rules”. HR needs to broaden its emphasis away from the recent history of a narrow one-point plan, which it calls “the business case”.