Organisations with a high ratio between the highest and lowest-paid employees may have lower levels of engagement and motivation.
Speaking in a panel debate at the Employee Benefits Summit on 25 June, Deborah Hargreaves, director of the High Pay Centre, said: “There comes a tipping point beyond which a high ratio begins to affect morale and demotivate [employees]. Academic work shows the lower the ratio, the higher employee motivation is.”
She added that, in the long term, this could lead to some destructive attitudes towards reward in an organisation. Therefore, it is important for employers to ensure staff understand the organisation’s thinking behind the ratio, what is happening with the ratio itself and how this has changed over time.
But while there are strong business reasons for identifying the ratio of the highest to the lowest pay level within an organisation, it is not always easy to calculate the ideal ratio.
Speaking in the same debate, Claire Morland, former head of compensation at Man Group, said: “What is the right pay ratio? It is difficult to know what the norm is in the first place.”
For example, some overseas employees could be operating in low-pay environments. Looking at executive pay within the context of an organisation’s wider pay practices and policies, therefore, is vital.
Hargreaves: “There is no perfect pay ratio, but it is a useful figure [for an organisation] to know.”
Roger Barker (pictured), director of corporate governance and professional standards at the Institute of Directors, added that there should be greater transparency around organisations’ pay ratios. “If investors demand this information, I don’t see why it shouldn’t be published,” he said. “In the US, pay ratios must be disclosed.”
I am sure it does demotivate the lowest paid employees but as they do not drive organisational performance dare I say, so what.
Paying anybody 300+ times more than the lowest salary is obscene and I would endorse any rule that capped this at 100 times. However, regardless of the constant HR rhetoric that people are not motivated by money, the reality is they are, mostly for status reasons after a certain point, so time to stop trying to force a one size fits all, lets all club together view and accept the realities of business.
capping at 100 times is utterly unworkable – this would mean that nobody in the UK economy would be paid more than £1.3million !
Those who take (appropriate) risk should be rewarded – Entrepreneurs deserve the pay off. Look at some of the great British business successes of the past couple of decades and ask yourself would these people have taken the risk if they didnt see some kind of reward ?
If you earn £13k you are taxed on less than 30% of it. If you earn £1million you are taxed on all of it and at significantly higher rates.
Markets work well on supply and demand – despite all of the press ‘noise’ about executive pay there have been few shareholder revolts and even fewer customer revolts – once we are back to a period of strong economic growth I doubt the issue will even warrant a mention