updated on 4/7/2015
“Pay inequality has been one of the most controversial public issues since the economic downturn,” according to a 2015 report by pay consultancy Hay Group, What You’re Not Being Told About the Pay Gap.
One of the most common methods of illustrating inequality is to show the increasing disparity between how much a CEO is paid and the average wage in the company, but there is also a significant distinction, on a percentage basis, in annual raises received by employees earning below $100,000 and those earning more than $250,000, Hay Group found, with wages rising proportionally faster for higher-level positions.
Percentage Increase in Pay, 2010–2014
U.S. data drawn from Hay Group’s PayNet database
Average Percentage Increase
$100,000 to $250,000
The rising gap in pay between senior- and lower-level jobs since 2008 represents an escalation of a longer trend going back at least several decades, according to the analysis. “These are trends that have been building for the last 30 years. And it’s been happening during years of economic prosperity as well as during recession,” the report notes.
Hay Group attributes increasing disparity to the following global business developments:
• Globalization has opened up new markets and workforces. In emerging markets, employees often earn less than those in mature markets (due to lower living costs), which can in turn affect wages in the home markets. It has also led to companies becoming far larger, especially when mergers and acquisitions are taken into account. Bigger companies mean bigger responsibility for the top executives.
• Digitization has led to some jobs being simplified (or automated), but it has also led to a boom in the need for professionals to design and manage the global systems. It has made it easier for companies to be global, with improved communication.
The combination of these factors has led to large corporations becoming more complex. Many former middle-management positions have been eliminated, leading to a “hollowing out” of companies with the “span of control” of senior managers increasing considerably over the past few years.
With fewer middle-management roles, “higher-level managers are seeing more complex work and responsibility than in past years. And the people that are able to deal with this responsibility are harder to find,” according to the report.
Higher-level managers also are now more likely to be responsible for overseeing more people, “which has contributed to pay being increased at the top end of the scale,” the analysis explains.
Supply and Demand
“At the bottom end, there’s really no shortage of people that can do low-skilled work, and that’s true in rich countries as that work gets automated or offshored and sent overseas,” explained Hay Group’s Ben Frost, global product manager for pay products, during a March 2015 podcast on the report’s findings. “What that means is that there is very little pressure to increase pay for jobs at the bottom end, where there is more supply than there is demand.”
In contrast, Frost noted, “at the top end, the emphasis is on high-level skills such as leadership, advanced judgment, emotional intelligence, and the ability to think creatively and solve difficult or unusual problems. And those skills are in short supply. That is putting pressure on pay for those jobs.” This is happening “not in any one industry or any one country. This is a long-term global trend.”
CEO: Help Low-Paid Workers ‘Share in the Recovery’
Aetna CEO Mark T. Bertolini told the Wall Street Journal (April 6, 2015) that he expects a “groundswell” of wage increases for the lowest-paid employees at large companies in the coming months. In January, the health insurer said it would raise wages for its lowest-paid employees to at least $16 an hour. McDonald’s, Wal-Mart and T.J. Maxx also have announced increases for their lowest-paid workers.
“How is it possible that a Fortune 100 company…has employees on Medicaid and food stamps?” Bertolini asked. “Instead of pointing at Washington,” he said, “why don’t we help everyone in our organization share in the economic recovery, and make this move, and ask other CEOs to do it?”
Bertolini expects higher wages to allow his company to realize some offsetting savings by reducing the $120 million spent each year on costs related to employee turnover, including efforts to attract and train new employees. He also said better pay should lead to workers being more productive in their jobs.
Pay Gap Navigation
“There is huge evidence that employee engagement and happiness increase when people are very clear about what their job expects and how they stack up against that,” Frost said. This includes “where they are on their career ladder and how they move to the next level, and also how their pay is decided.”
To better address challenges to job satisfaction and engagement caused by pay gap issues, Hay Group recommends taking the following steps:
• Be transparent. Explain your pay policies and get on the front foot to explain the underlying trends at work.
• Be realistic. Be aware of the changing demands on your workforce, and plan for them. Look at strategic workforce planning.
• Be clear. Speak openly about the skills you need and the skills you expect you’ll need in the future.
• Provide skills training at work. Consider how skills can be taught at work. This is particularly important for young workers who haven’t yet learned the “soft skills” needed in the workplace.
• Invest in long-term development programs. Build up a talent pipeline. Best-practice companies both develop skills internally and promote from within, “which is cheaper and often more reliable than going to the market,” the report states. This can take the form of assigning workers to different areas throughout the company so they can learn more diverse skills.
Companies should have “deliberate career development policies that take people out of their comfort zones, to build up a cadre of people who can lead the organization in the future,” noted Nick Boulter, Hay Group’s managing director of reward services, during the podcast.
He advised that companies “Identify the skills that will be needed higher up the chain and put in place programs to develop those capabilities internally among your own employees.”
Companies also should “ensure that rewards from globalization and digitalization are not just kept to the people at the top of the company,” Boulter said. They can do this by taking deliberate steps “to enable the benefits of the wealth generated to be shared among all employees,” such as through pay-for-performance policies, variable pay, and profit-sharing programs tied to individual, team and companywide achievement.
“Clearly there are a lot of emotional issues involved [when there is wide pay disparity], and that’s why there needs to be a proper debate to get the supply side and the demand side actually in sync,” Boulter noted.
Executive Pensions Swell as Well
Pension gains averaged 8 percent of total compensation for top executives at S&P 500 companies in 2014, up sharply from 3 percent the year before, theWall Street Journal reported (March 25, 2015), citing data from LogixData, which analyzed Securities and Exchange Commission filings.
The gains were even larger for some executives, totaling more than $1 million each for 176 executives at 89 large companies that filed proxy statements through mid-March 2015. For those executives, pension gains averaged 30 percent of total pay.
According to the Journal, the growth in value of executive pensions is “creating an optics problem for companies at a time when executive-pay levels are under greater scrutiny from investors and the public.” And, it could be added, from employees struggling to fund their retirements primarily through 401(k) contributions.
At Lockheed Martin Corp., “CEO Marilyn Hewson’s total pay rose 34 percent to $33.7 million last year, with $15.8 million of that stemming from pension gains,” the Journal reported. “Last June, Lockheed Martin told its nonunion employees that it would stop reflecting salary increases in their pension benefits starting next year, and that the benefits would stop growing with additional years of work starting in 2020.”
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.