Election 2010: Why fair pay policies should matter to HR

Trawling through the political parties’ election manifestos, the most common word you find, alongside ‘change’ and ‘hardworking families’, is ‘fair’. All three main parties claim the mantle of ‘fairness’, that is an equitable distribution of the economic spoils and just and transparent processes to achieve it.

And for once, they all seem to be promising what they preach. So we have, for example, the Liberal Democrats’ proposals to take those earning less than £10,000 out of the income tax net and for compulsory equal pay audits; and Labour’s commitment to raise the national minimum wage by at least the rate of inflation by 2015, as well as the recently enacted provisions in the Equality Act.

But most of all it is evident in the proposals targeting the higher paid, with, for example, Labour freezing top public sector salaries and giving the Financial Services Authority additional powers to control executive pay in banking; the Lib Dems restricting bankers’ cash bonuses and extending disclosure provisions for public companies; and the Conservatives wanting to cap public sector pensions greater than £50,000.

But it was Tory leader David Cameron’s proposal to set up a fair pay review and establish a cap on the pay of top executives in public sector bodies of 20 times the earnings of the lowest paid that seemed to really spark interest. Cameron was right to re-assert the importance of fairness as a national and employer pay policy objective; it has been subordinate for many years to considerations of the market and performance, which have helped to drive the escalation of pay differentials in public and private sectors.

Research clearly shows that perceptions of fair pay and treatment at work can have a major effect on levels of employee motivation. For example, one study found that pay fairness was 25 times a more powerful driver of employee engagement than simple pay satisfaction or competitiveness. Some have criticised Cameron’s proposals for affecting perhaps just a dozen or so public sector employers, although I find it interesting that most remuneration committees are completely unaware of the pay differentials in their organisation and how they have increased.

But it raises important questions for the private sector, where differentials have widened much further. Commentators have pointed out that if this cap was implemented there, then 10 of the chief executives who signed the recent letter opposing the increase in national insurance contributions would have been able to reduce their remuneration levels in total by a cool £70m.

CBI chief Richard Lambert warned last month of the detrimental impact of escalating executive pay. A typical FTSE 100 CEO’s pay has soared from 47 times the average pay (average, not lowest, pay in the organisation) in 1999 – to 81 times last year. Lambert warned that chief executives risked being treated as “aliens” because they were becoming so far removed from the public and politicians.

The trouble with fixed pay ratios and caps is their inflexibility, which can create perverse effects. If Cameron’s proposal was introduced across the public sector, just watch executive pay levels inflate up to the 20 times multiple (10 to 15 times would currently be more typical across local and health authorities) and the trend towards the outsourcing of low-paid jobs intensify.

But the issue, if not the exact vehicle, that Cameron highlights is the right one for all employers to be reviewing and addressing. Company founders John Spedan Lewis and Ove Arup both declared that excessive senior pay divided rather than incentivised organisations. It can be no coincidence that today, the Arup Partnership and John Lewis are two of the UK’s most successful businesses, with high levels of customer satisfaction. They are also characterised by high levels of employee engagement, supported by general all-staff profit-sharing arrangements and comparatively modest internal pay differentials.

And in the public sector, it is the Army – a service where workforce morale and cohesion are life-savingly critical – that displays one of the lowest ratios between highest and lowest paid of 7:1.

Plato proposed that in his Utopia, nobody should earn more than five times what their fellow citizens were paid. Maybe that is unrealistic today; but HR directors should certainly be monitoring their own internal pay differentials and be concerned about how everyone can have the opportunity to share in the success of their organisation.

Better that they do this themselves rather than the politicians and more legislation come and do it for them. And remember that those people that the political parties are appealing too are also your employees.

Duncan Brown, director, HR business development, Institute for Employment Studies

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