Confront Pay Disparity Between Management and Workers

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.

Decades-Long Trend

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.”​

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.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.​