High Pay Centre analysis shows hidden cost of big pay differentials within organisations
Workplaces with big pay gaps between the highest and lowest wage earners suffer more industrial disputes, more sickness and higher staff turnover than employers with more equitable pay differentials, a landmark report reveals today.
A High Pay Centre report today shows, on average:
- Bosses earning 10 times more than the lowest-paid staff in their organisation experience industrial action at least once a year. Those with lower pay differentials do not.
- Workplaces where top earners get 8 times the pay of junior staff report at least one case a year of work-related illness. Workplaces with pay differentials of 5 or less do not report any.
- Organisations with average pay ratios of 7:1 experience higher staff turnover.
The report, The High Cost of High Pay, is based on a survey of almost 2,000 workplaces and reveals the true cost of pay differentials within the workplace.
High Pay Centre director Deborah Hargreaves said: “High executive pay is not only frequently unmerited but has a huge hidden impact on the rest of the organisation and society as a whole.
“Whether it’s through staff turnover, sickness, low morale or industrial action, big pay gaps undermine employees’ loyalty to the company and their managers.
“Employers suffer lost productivity, have to pay more sick pay and legal and recruitment costs as staff left feeling the financial and emotional strain are driven even further into the ground.”
The High Cost of High Pay is described by authors as ‘an important step in challenging current thinking and practice around reward strategies in the workplace’ and tackles the basic premise of the so-called ‘Tournament Theory’. The theory claims that bigger pay gaps encourage people to work harder, was trumpeted in Boris Johnson’s claim that “inequality is … a valuable spur to economic activity” and is implicitly applied by most major UK firms.
The report questions whether an employee is likely to have higher motivation if his or her bosses earn 80 times more than them.
It warns that any positive effects of motivation from extreme pay inequality are likely to be outweighed by impacts on staff morale and shows how, when stretched too far, pay differentials actually have a negative impact on companies.
Note to Editors
1. The High Cost of High Pay: An analysis of pay inequality within firms is published by the High Pay Centre on Monday 20th January 2014. The research was conducted by academics from the Centre for Equality and Diversity at Queen Mary, University of London. The research was supported by the Webb Memorial Trust.
2. A recent report by the Health and Safety Executive (HSE) showed work-related stress accounted for 10.4 million days lost in 2012, with employers losing an average of 24 days per case. The costs of this include sick pay payments, insurance premiums, production disturbance costs and admin and legal costs. The HSE report says workplace illness costs society an estimated £8.4 billion. The Chartered Institute of Personnel and Development’s figures show the costs of labour turnover average at £5,8000 per employee, with senior staff totalling an average of £20,000.
3. The High Pay Centre research used data from the Workplace Employment Relations Survey 2011 to compare levels of employee performance and conflict against the Gini coefficient for each company. The Survey includes information on the characteristics and management practices of 1,923 workplaces, based on a survey of managers and over 21,000 employees. The research compared commitment and job satisfaction in workplaces with varying levels of inequality (as shown by the Gini score). It found that in the most unequal workplaces, further increases in inequality do not bring greater performance and employee attitudes. Further analysis also showed that workplaces with higher levels of inequality have greater levels of industrial action.
4. The 2013 Manifest/MM&K Executive Director Total Remuneration Survey found that the total pay awarded to a FTSE 100 company executive is now 133 times that of their average employee, up from 107 times in 2002. The average package was £4.3 million in 2012.
5. The French Government has announced caps to executive pay in state-owned companies at 20 times that of the lowest paid worker. In the USA, the Dodd Frank Act mandates companies to publish the pay ratio between the highest paid employee and the median. The Hutton Review into public sector pay discussed the idea of applying a 20:1 pay cap across the UK public sector, but did not endorse a mandatory pay ratio as a policy recommendation.