Fair Pay: What do the Politicians and HR Directors want?
22 Apr 2015
Duncan Brown, Head of HR Consultancy
With the launch of the major political party manifestos last week, as in 2010 the word 'fairness' has high prominence in all of them, possibly only exceeded in frequency by the numerous references to 'hard working families'. In terms of the economy, our party leaders, like all self-respecting HR directors, unequivocally seem in favour of 'rebalancing' (Conservative) and of making Britain a 'high skills economy' (Labour). But while in 2010 the concomitant implications for high or even higher wages were distinctly hazy, now they couldn't be clearer. Amongst the politicians at least.
The Liberal Democrats’ Manifesto strap-line for example, of ‘Fairer Society, Stronger Economy’ will be delivered by a ‘world class education for all’ and ‘with steadily higher wages and better employment rights’. To achieve this, they would ‘establish an independent review to consult on how to set a fair Living Wage’ and ensure this is paid by all central government departments and executive agencies from April 2016 onward. They would also ‘ask the Low Pay Commission to look at ways of raising the National Minimum Wage, without damaging employment opportunities’ (although this only seems to match their existing brief) and ‘consult on requirements for companies to conduct and publish a full equality pay review (as already is the case in some EU countries), and to consult staff on executive pay’.
Labour wants to ‘reward hard work’ and ‘reward outstanding achievement’ with too many people currently in ‘precarious, badly paid jobs’, promising ‘a more equal society’ and ‘to build the high-skill, high-wage economy we need’. In power, they would move the National Minimum Wage up to at least £8 an hour by the end of the next parliament, ‘promote the Living Wage’, for example with tax rebates for employers that sign up to it, and also ‘introduce a law to prevent employers undercutting wages by exploiting immigration’. Interestingly too for them, fair pay means not only raising low pay but ‘improving the link between executive pay and performance by simplifying pay packages’ and John Lewis-style, ‘putting employee representation on remuneration committees’.
The Conservatives want to continue to build a strong economy based on ‘the hard work of the British people’ and providing ‘a decent income’, promising that ‘our plan will help to generate jobs and higher wages for everybody’. Their focus would be on increasing take home pay by raising the income tax threshold from £10,600 to £12,500 – ‘lifting one million of the lowest-paid workers out of tax altogether’ – and the level at which people start paying the 40p rate from £42,285 to £50,000. They ‘strongly support the NMW’ and want to see ‘further real increases in the next parliament’, up to £8 an hour achieved by 2020. They also would ‘encourage businesses to pay the Living Wage, where they can afford it’.
At the top end, the Conservatives would help to ‘protect hardworking taxpayers from future banking crashes’ with ‘new pay structures (and)…the toughest regime of bonus deferral and clawback of any financial centre’ for senior bankers. And like all three parties, they would ‘abolish abuse of zero-hour contracts’ to help ‘stop firms from being dragged into a race to the bottom on wages and skills’ (Labour).
But given the UK’s growing shortfall in productivity of some 20% against our major international competitors, there is surprisingly little in all of the manifestoes about helping and encouraging employers to improve workplace productivity, when you would think it could do with some support. As my IES colleague Jim Hillage points out, declining productivity is one of the surprising features of the UK’s economic upturn and one which should top the next government’s agenda.
Correspondingly, with such all-party support for higher and ‘fairer’ pay, it’s interesting to see that employers and their HR functions, by contrast, appear to be much less keen on increasing pay. The most recent average earnings figures confirmed that after an unprecedented five successive years of declining real earnings, average wage awards are now outstripping price inflation.
But there has been significant decline in the latter, with consumer price inflation in the year to March of zero, as well as compositional effects on the data from the recent surge in full-time employment. Pay increases themselves remain distinctly modest, falling by 0.2% last month to 1.7% annual growth, despite economic forecasters and the Bank of England regularly anticipating much higher increases, and fearing the effects of a deflationary spiral.
HR’s reluctance to move on the pay front is perhaps understandable, given the lack of productivity to fund higher awards and the growing evidence base which suggests that traditional individualised performance pay models fail to generate the desired performance outcomes. However, that does not take account of the armoury of alternative pay techniques to support improved productivity with a much more positive evidence base on their side.
Employers and HR directors in this country make relatively low use of techniques for paying for skills, or ‘learning and earning’, despite the fact that the research record on these types of plan is reasonably strong – see for example Gerry Ledford’s American research on skills-based pay.
Martin Weitzman similarly summarises the research on profit sharing plans as a way of boosting earnings as ‘a fairly coherent picture of a positive link between profit sharing and productivity’.
How fair and motivating do the employees who will drive any productivity improvements think the current pay situation is, do they feel they will share in any productivity gains? The CIPD’s latest data on employee attitudes finds that just 53% of UK employees got a pay increase last year. Their measure of net pay satisfaction was +37. And guess what? Amongst those who received no increase the net satisfaction was -44, driven by the failure to match inflation and to pay for the person’s performance.
In a fascinating presentation in London last month, University of Massachusetts economics professor Arindrajit Dube presented research showing the positive economic effects for US cities such as San Francisco of adopting local minimum wage rates above the federal requirement. The higher pay rates paid off, with improved staff retention and productivity and almost zero effect on employment.
Hence all of our political parties and their leaders are cajoling business leaders to, in the Prime Minister’s words ‘give Britain a pay rise’ and share the proceeds of rising profits with their staff, not just their executives, which will be good for those employers, their low paid mostly young and female employees and also our low productivity UK economy.
So why isn’t HR responding, when in techniques such as profit sharing and skills-based pay, we have the tools to do so?