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

Blog posts

18 Mar 2020

Duncan Brown, Head of HR Consultancy

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The Politics

Last week’s Budget included, amidst all those billions of virus-induced spending, a welcome strengthening by rookie Chancellor Rishi Sunak of the government’s ‘promise to level up’ and commitment to ‘end low pay’. He plans to follow up next month’s record 6.2 per cent increase in the National Living Wage (which is the minimum for over 25 years olds in employment) affecting two million employees, with the target to continue to raise the relative level of the NLW up to two-thirds of average earnings by 2024. This would make it £10.50 an hour in real terms, compared to the current £8.21. It will also apply in future to over 21 years-olds, making an even larger increase for them.

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

But how should employers as opposed to governments react to growing levels of inequality and in-work poverty evident in the UK over recent decades? In a chapter in a forthcoming book[1] which pits proponents and opponents of more equal pay levels and practices against each other, Peter Reilly and I note that ‘employers have generally not reacted swiftly to this changing context, with HR and reward managers continuing business as usual executive incentivisation, responding to government regulation to the minimum extent necessary’. Peter and I strongly advocate that employers be more proactive and respond to these increasing social and political concerns at growing inequality and perceived unfairness - driving pay practices.

The Pros and Cons

We document the research evidence and illustrate with employer examples the advantages of more equal pay levels, including that:

• 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

As we have seen, there are arguments for greater pay equality from an organisational perspective, but there are also serious objections. While recognising the reality that Cuban-style equal pay levels for all will never occur in this country, we see the value in limiting escalating inequality and of rebuilding some of that post-War consensus in which we collectively share the risks and rewards of being a member of our particular organisation or society.

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.