Why have pay ratios?

When asked, the majority of us think the pay gap between the highest paid in our society and the rest of us is too large, with more than 80% of us saying so in the British Social Attitudes survey of 2013.

Indeed, in a survey commissioned by the High Pay Centre in 2015, 66% of us said there should be a maximum pay gap so bosses cannot earn more than a fixed amount above the average employee of their company.

In recent research commissioned by Oxfam in September 2016, 59% of people said business has a responsibility to reduce poverty and inequality, 76% said it has a responsibility to close the wage gap between the highest and lowest or average employee wage, and 64% said they would support legislation which stopped the highest paid employee in a company earning more than twenty times the company’s average employee salary.

Countries of the United Nations, including the United Kingdom, signed up to the Global Sustainable Development Goals in September 2015.  These include a specific goal to reduce excessive wage inequality at Goal 10.4: Adopt policies, especially fiscal, wage and social protection policies, and progressively achieve greater equality.

Evidence also shows that societies with smaller income inequality – the income difference between those people with high incomes and low incomes – are generally happier, healthier and a better place to live for almost everyone in them.  Pay is the biggest part of our income for most of us so plays a critical role in income inequality.

Further research is showing that as the pay gap increases in our workplaces so too does the likelihood of workplace conflict, increased staff turnover and work-related illness, with all the associated economic consequences.

And emergent research is showing that consumers prefer to buy from employers who they consider pay fair – where employers can use their pay ratios to help show how fair they pay.

 


Pay ratios show how an employer shares out pay amongst their employees.  This is called pay dispersion.

A pay ratio is typically calculated as the ratio of the pay of the highest paid employee of an organisation to the pay of the average or lowest paid employee in that organisation.

Pay ratios (sometimes called pay multiples) are a way of measuring and tracking pay dispersion, enabling us to compare a company’s performance over time and against that of other companies.

 


An Independent Government Review

In June 2010 the Prime Minister and the Chancellor of the United Kingdom commissioned Will Hutton to make recommendations on promoting pay fairness in the public sector by tackling disparities between the lowest and the highest paid in public sector organisations.

In March 2011 Will Hutton published the Final Report of his Independent Review into Fair Pay in the Public Sector, along with his recommendations to the Government for a Fairness Framework for Senior Public Service Pay.

His report provides the following summary recommendations for the framework for fairness in senior public service pay:

  1. Using pay multiples to track executive pay against that of all employees
  2. Informing the public debate through annual Fair Pay Reports
  3. Re-calibrating the pay of Non-Departmental Public Body chief executives
  4. From disclosure to explanation: ensuring complete transparency over executive role and remuneration
  5. Enabling citizen analysis of executive pay
  6. Abandoning arbitrary benchmarks for public service pay
  7. Preventing rewards for failure through earn-back pay for senior public servants
  8. Extending earn-back pay to high performing middle managers
  9. Sharing the rewards of greater productivity
  10. Opening up opportunities for future generations of public service leaders
  11. A Fair Pay Code
  12. Tracking pay multiples across the economy

 

Recommendation 1: Using pay multiples to track executive pay against that of all employees, specifically recommended:

The Government should not cap pay across public services, but should require that from 2011-12 all public service organisations publish their top to median pay multiples each year to allow the public to hold them to account.

 

Recommendation 12: Tracking pay multiples across the economy, specifically recommended:

To make tracking pay multiples normal practice across the economy, as part of its commitment to improve corporate reporting, the Government should require listed companies to publish top to median pay multiples in their annual reporting from January 2012.