Combating Inequality 2: The Budget and levelling up, levelling down and levelling in

Duncan Brown, Head of HR Consultancy

The Politics

While the government has also been acting to address the upper end of inequality with the new requirements for quoted companies to publish their internal pay ratios, this action at the lower end should help to narrow escalating pay and wealth differentials in the UK.

In an excellent analysis last weekend, the Resolution Foundation’s Torsten Bell rightly highlighted that ‘the myths of both left and right stop us seeing the true story of inequality’. Which is that while everyone’s living standards have been squeezed over the past decade — to an extent unseen since the Napoleonic Wars — by high inflation and week economic and wage growth, the living standards of the poorest have actually fallen the most. The bottom 20 per cent of families have lost a tenth of their incomes since 2010, putting us on track to reach record levels of nearly five million children in poverty by 2024.

The Practice

The Pros and Cons

  • Pay equality facilitates flexible staff deployment and can encourage up- and multi-skilling.
  • Organisational change is thereby easier where staff can be more interchangeably assigned.
  • Innovation flourishes where there are high levels of job autonomy and collaboration, with few impediments (such as wage differentials and over-individualised reward) to trialling new ideas. (Reilly and Sheehan 2017).
  • Pay equality can enhance pay transparency and remove the demotivational effects of excessive pay variability. Research (Mulvey et al. 2002[2]) suggests that clarity and transparency in reward provides real benefit.
  • Pay equality helps to engage all employees behind the strategy and performance goals of the organisation. CIPD (2015) research also highlights that high executive pay levels are demotivating to seven out of ten workers.
  • Reward mechanisms antipathetic to pay equality usually involve individual incentives offered to encourage certain behaviours and deliver certain outcomes. Executive incentives are the most widely provided example, despite evidence that they do not motivate participants (CIPD 2019).

We are not blind to and indeed also describe the difficulties and downsides of more equal pay levels pointed to by the other half of contributors to the book. They include:

  • Difficulties in defining equal pay — does the same pay level apply irrespective of number of working hours, shift system, unsocial times?
  • Pay equality fails to acknowledge real differences in what people bring to work (knowledge, skills and experience), the responsibilities they take on, the conditions under which they labour, etc.
  • Similarly, there is no incentive or recognition for growth in skills and competence; no personal return on learning. This is despite the fact that skills-based pay has a strong research record (Lawler et al. 1993).
  • Doing without financial incentives might lead to reduced productivity/performance.
  • Whilst we noted earlier the objections to individual performance-related pay, there is evidence that well-deployed incentives can work (Tamkin 2005).

Our Position

So how might employers move towards greater equality, internal cohesion, motivation and consensus in support of the essential productivity improvements that employers and governments seek, after a decade of disappointing GDP statistics? Peter and I suggest a shift in practice might include both:

  • ‘Levelling up’, with improved pay and conditions for the lowest paid workers, but critically, as our research for J.P. Morgan (2019) has shown, the adoption of ‘promote from within policies’;

and

  • ‘Levelling down’, by removing complicated and differential-widening executive Long-Term Incentive Plans and re-harmonising differentiated benefits such as pensions;

alongside of

  • ‘Levelling in’ through the widespread adoption of self-funded and generated rewards for higher levels of collective performance, delivered through all employee share and profit and gainsharing plans.

Thus, Peter and I argue that employers, politicians and wider society should work to achieve an Aristotelian “balance” between the extremes of total equality and increasingly high rates of inequality.

[1] Anders Örtenblad (forthcoming) ed “Debating Equal Pay for All: Economy, Practicability and Ethics” Palgrave Macmillan

[2] Mulvey, P.W., LeBlanc, P.V., Heneman, R.L. McInerney, M. (2002). The knowledge of pay study: E-mails from the frontline. Scottsdale, AZ: World at Work

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Any views expressed are those of the author and not necessarily those of the Institute as a whole.

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