Mind the Wage Gap

What do you think is the pay differential between the CEO of a company and its lowest skilled worker? And what do you think should be the pay differential?

In research published last November in ‘Perspectives on Psychological Science’, Kiatpongsan and Norton investigate what pay differentials people desire and whether these differentials are consistent among people from different cultures. Gretchen Gavett has written a helpful article summarising their research. You can read it here.

Norton says:

“My coauthor and I were most surprised by the extraordinary consensus across the many different countries in the survey. Despite enormous differences in culture, income, religion, and other factors, respondents in every country surveyed showed a universal desire for smaller gaps in pay between the rich and poor than the current level in their countries.”

What is also extraordinary from the research is the sheer size of the pay differentials, for example around 350 to 1 in America. And most people are completely unaware of the size of the staggering pay gap.

Gavett writes in her article:

“We’re currently far past the late Peter Drucker’s warning that any CEO-to-worker ratio larger than 20:1 would “increase employee resentment and decrease morale.” Twenty years ago it had already hit 40 to 1, and it was around 400 to 1 at the time of his death in 2005. But this new research makes clear that, one, it’s mindbogglingly difficult for ordinary people to even guess at the actual differences between the top and the bottom; and, two, most are in agreement on what that difference should be.”

Indeed, Norton says: “The lack of awareness of the gap in CEO to unskilled worker pay — which in the U.S. people estimate to be 30 to 1 but is in fact 350 to 1 — likely reduces citizens’ desire to take action to decrease that gap,”

Over the years Relational Thinking developed a tool (Relational Proximity® Framework) that can help people, organizations and businesses to measure the closeness and health of their relationships. For this it looks at five factors or dimensions of a relationship: the fourth of these is power. While inevitably in companies some people will have greater power than others, the goal should be parity, so that people will be treated fairly and with mutual respect and understanding. As the research shows, everyone agrees that the huge pay gaps of the kind we see today are unfair. There is no parity between the low paid in the company and CEO at the top.

In ‘Transforming Capitalism From Within’, Jonathan Rushworth and Michael Schluter write “If, for instance, senior executives are paid more than 100 times the amount paid to lower-paid employees, which is not unusual, this can be seen as suggesting that the lower-paid employees have a worth to the business of less than one percent of the highest paid employee. Is it fair that the contribution to the business of the lower-paid employees is regarded as so insignificant as to be valued in this way?”

There are also wider relational consequences outside of the workplace  in undermining social cohesion. The highly paid will live in different locations, use different means of transport and different shops and go to different countries on holidays.

Higher rates of remuneration are certainly justified to reward greater responsibility and experience, longer working hours and often longer training, but there should be a regard for others. The key is not the same pay, but fairness.

In ‘Transforming Capitalism From Within’, the authors argue for a Relational Business Charter, which sets out ten principles which in a practical way provide a framework to indicate whether companies are being managed and operated in a Relational manner in the interests of all stakeholders. The sixth principle is that “[t]he dignity of all employees is respected by minimising remuneration differentials within the business”.  They recommend a maximum pay differential of 1:20, so that there is parity within the company. And as Kiatpongsan and Norton’s research  shows, most people would agree.

What are the pay differentials in your organisation? How can you encourage greater parity within your organisation? How can you improve its relationships?

To find out more, you can buy Transforming Capitalism From Within as hard copy here or here as an ebook.

Photo: Mind the Gap by gmacfadyen.