As the gap between high earners and the low paid grows ever wider, Peter Crush looks at what strategies firms can adopt to ensure their entire workforce stays motivated
Every so often statistics appear that don’t seem real. Take, for example, the very real disparity between those at the top and those at the bottom of the income scale. The world’s 80 richest people have the same wealth as the bottom 50% of the rest of the globe. Moreover, according to Oxfam, the richest 1% now has as much wealth as everybody else in the world put together.
Closer to home, it’s other top-bottom disparities that matter: the increasingly widening gap between what those at the higher echelons get as their reward package compared to those at the bottom of the pile.
Today, chief executives in the FTSE 100 earn 183 times what their average worker does – up from 47x less than 20 years ago and 139x just five years ago.
Foremost among employee gripes (according to the CIPD’s recent What Employees think about their CEO’s Pay Packet report), was lack of transparency (from 72%), while 62% believe shareholders should claw back bonuses and other incentives if company performance declines.
The sheer difference between top and bottom employees creates other problems, too – not least how organisations decide their strategies for very high and very low earners. Is it possible that a one-size-fits-all approach could work, or do both extremes require their own special attention?
“It’s an interesting conundrum rewards bosses face,” says Deborah Rees, director of consulting at remuneration firm Innecto and a former head of reward at Nationwide.
“You could say those at the top and bottom are the most controlled by regulation and legislation, and that there’s actually far less protection around those in the middle. But the main problem is creating the feeling ‘we’re all in it together’, while being individual enough – and yet not too much, so that those at the bottom feel valued, but don’t resent what those at the top get. It’s tricky.”
Companies attempting to do this include ITV, which recently repositioned itself to offer a non-hierarchical, flat reward system, where the same minimum goes to all (from top to bottom).
Anyone who then wants to bolster their package can ‘buy’ benefits from their own salary. “This has long been the driving principle of flexible benefits,” says Ed Smithson, head of flex at Xerox HR Services. “It’s not a leveller in the sense it offers different things to people at different ends of the scale, but it does at least give equality of choice, and people can feel empowered at whatever level of income they have. Someone being able to buy a bike for work gets the same, if not more satisfaction that the MD being able to get extra life insurance cover.”
Finding common ground
A reward vehicle everyone can access creates a common psychological bond but, according to some experts, treating those at the top and those at the bottom as ‘different’ can mean simple pleasures common to all get ignored.
Adrian Lock, senior consultant at Roffey Park, says: “Research we’re about to publish finds that as soon as you pay people enough to take money out of the reward conversation, after that employees at all levels share similar needs/aspirations, so reward plans should recognise this.”
Roffey Park finds most higher-tier managers, for example, are more motivated by opportunities to ‘make a difference’ (86%), and he suggests organisations should consider offering more perks around volunteering and mentoring.
Not only do these initiatives cut through the earnings spectrum, they’re not expensive to provide. He adds: “I think ‘purpose’ will be one of the top trends for 2016 – how can work provide purpose? This is not a top or bottom thing, but something that can, and should, be provided for all.”
But, this fact notwithstanding, should employers also acknowledge that there are very different needs that they can cater for, and which could yield significant buy-in from staff at different levels?
At the lower end of the scale, some certainly think so.
Helping with debt
Asesh Sarkar is the chief executive and founder of social enterprise SalaryFinance. This organisation enables low-earning staff who may have lots of loans to consolidate them and start paying them off through their payroll at an extremely low 7.9%.
He says: “When we speak to HRDs, they often don’t know what life is like for their low earners. They may not know many have multiple payday loans, running at 1,000%+ interest. It’s a fact, though, that one in three staff say their performance is affected by financial worry, and by helping them fix this, there are huge engagement gains employers can gain.”
According to Sarkar, average low-income employees carry £4,000 of debt, and they’re charged at an average rate of interest of 22%. Through its offering, for every 1,000 staff on board, £250,000 pa in interest (around £526 per loan) is saved.
He says: “There are bigger benefits to be had, too. Typically, once someone goes to a payday lender, banks blacklist you further down the line for things like mortgages.
“With our solution – which we’ll also be rolling out soon with Benefex and other benefits portal providers – banks will once again look favourably at them. It has the potential to change people’s financial lives, and employers can be a part of it.”
Martha How, reward partner at Aon Hewitt, says despite theoretically being able follow the same reward strategy “from chief executive to post boy”, the way firms execute reward means differences between the top and bottom are inevitable.
She says: “The board in larger companies will have their remuneration set and monitored by reference to a “remuneration committee” with different rules around buy-outs and restrictions in shares.”
She adds: “Variable pay also presents the most challenges, because the bald truth is that it is difficult to design a top-bottom variable pay plan that incentivises great performance but that can be seen to be fair and transparent.”
She adds: “Variable pay plans must be designed to reflect roles, and hence there are often five or six variable pay plans in any one business – from sales commission plans through to profit-sharing ones.”
For the very highest earners, there will also be issues unique to them as much as there are for lower earners – such as the fact that from April the maximum amount pension savers can put into their pensions falls from £1.25m to £1m.
Breach this, and staff will face paying 55% tax. Perhaps surprisingly, up to 460,000 people between 55-65 could be affected, and new joiners into pensions today will hit that ceiling before they retire.
With pensions becoming more mainstream, employees at the top end are expecting their employer to have a solution for sorting this out – like providing access to financial advice. The amount those earning between £150,000-210,000 can pay into their pension will also gradually fall from £40,000 to £10,000 from April.
“This moves reward strategy more towards wealth management services,” says Smithson. “Staff will need other platforms to be provided to them to put excess money into – such as company cars, or other flexible benefits.”
One size doesn’t fit all
A good rule, say experts, is not to pigeonhole some benefits as being exclusively purely for high earners. “Bonuses are often associated with top-level executives, while lower-level employees may miss out on financial incentives. But this is a mistake,” says Tom Castley, vice-president at performance management company Xactly.
“Our research finds more than a quarter of staff say a financial bonus is their top motivator and is the reward they seek.”
He adds: “Bonuses, commission and other monetary aspects are some of the quickest motivational levers companies can pull to align and motivate staff and can be applied throughout the whole organisation.”
That said, managers need a holistic view. He says: “It’s not enough to tell employees they’ll get a bonus ‘if they hit targets’. Staff need to understand what they need to do to achieve this and be able to map their performance against this.”
Paul Hajduk, the managing director at consultancy Paydata, says: “A role lower down an organisation is likely to be transactional in nature, working to short time frames, whereas a role at the top of the structure is likely to shaping the direction of the organisation and working within long time frames.
“This should get translated into practices that reward immediate work outcomes lower down the structure (for example payment-by -results schemes), to rewarding long-term performance higher up the structure – such as share-based rewards.” He adds: “What is important is to ensure that the behavioural objectives of each reward element remain consistent with the strategy and values of the business.”
THE CASE FOR: Difference in strategy
Mark Thompson, head of reward consulting, Korn Ferry Hay Group:
“The factors influencing remuneration at the top and the bottom of an organisation are fundamentally different. If a chief executive can influence shareholder value of a £1bn business by 10%, then the return on his/her salary can be as much as £100m. That’s a far bigger return than you get from the salary of the lowest-paid roles in the business. This dynamic means any attempt to bring some values around equity and consistency to the management of pay are pretty well doomed. Even where top pay has been highly regulated in the past (in Ireland in the 1980s and 1990s, for example, the salaries of bosses of semi-state companies were capped), this is not much use in the face of the pressure of global market forces. Regulations around a ratio of pay between the highest and lowest earners – likely to be enacted in the US and a possibility here, too – are similarly doomed to fail unless imposed across the world.
THE CASE FOR: Similarity in strategy
Paul Bartlett, head of employee solutions, Grass Roots:
“On the face of it, it makes sense to have reward strategies that link the individuals to their influence on the overall business performance and the time horizons over which they can make a measurable impact. That said, there are certain underlying facets of a reward strategy that can be equally applied whether the person is at the bottom or top of an organisation, namely in recognition and wellbeing. Irrespective of earnings, everyone responds to being thanked and told when they are exhibiting behaviours that take the organisation forward. Top to bottom recognition should be cornerstone of a reward strategy. Moreover, while recognition generally rewards the right behaviours, improved productivity and performance can be promoted through wellbeing. More ‘whole life’ improvement can be a focus for reward with differentiation.”