THE BLOG
29/01/2019 11:29 GMT | Updated 29/01/2019 11:29 GMT

The Real Problem Isn't Executive Pay, It's That Everyone Else Is Underpaid

Companies are being forced to be more transparent with CEO pay, but we need to go further so employees know how they're being ripped off

Gary Yeowell via Getty Images

So the dust has settled on another year’s Fat Cat Friday. The gap between what CEOs earn compared to employees has widened again so that CEOs now receive their average workers’ entire annual salary in just four days. This has, predictably, led to the usual chorus of groans and gnashing of teeth from various quarters, with experts sharing their views on the scandal.

In the red corner, we have everyone from Dave Ward of the CWU to famed economist Thomas Piketty saying that the whole thing stinks and something must be done. Wildcat strikes and 80% salary taxes being the ideas in mind.

In the blue corner, we have The Economist telling us que sera sera – it’s all very unpleasant admittedly, but hold your noses and you’ll be just fine.

What about the rest of us? If accounts are to be believed then your average Joe is getting mightily disgruntled by it all and just a little bit demotivated to boot. So what gives?

It’s very easy to get hot under the collar about such an emotive issue as pay. Plenty of analyses have been done to explain the cause of the problem as being anything from corporate greed to poor boardroom governance, but none of these really have really identified the root of the issue.

One little-known study could, however, help shed light on where the problem really lies. According to Professors Bell and Van Reenen of the LSE, the real issue is not that CEO pay has been inflated, but that worker pay has simply not kept pace. And not merely by a few percent here or there, but by a whopping 15 times. Every year. With this kind of disparity you can see it doesn’t take long for a yawning pay chasm to develop, which then compounds exponentially.

The bottom line from the analysis is that CEO pay has indeed mostly tracked financial gains in the firms they represent, but that the gains are not being shared lower down. Lower-level managers have a pay-performance correlation of just a fifth of CEOs, and when you get to worker level there is no correlation at all.

This is all very odd. So if we’re looking for the culprit, and it’s not CEOs or corporate boards, or even Mrs Plum with the candlestick in the living room, who could it be?

You would naturally look to whoever advises and sets pay for those below boardroom level – and that takes you to good old HR.

As a profession HR has for a long time been criticised for being overly bureaucratic, rules-based and, by CEOs, out of touch with the business. But when it comes to pay, creating such huge disparities really do take some beating. The more you look at it, the more it looks like ‘kiss up, kick down’ behaviour on an industrial scale.

It’s facilitated by performance management systems (that don’t reward you for performance) and competencies (that don’t identify what you’re truly good at). In other words we’re back to a modern version of the capitalist pyramid, with captains of industry taking the place of kings who ‘rule you’ and HR taking the place of priests who ‘fool you’, creating a mere illusion of equity. The real problem is not that CEOs are being overpaid, but that everyone else is being underpaid by staggering amounts, and also that most of us are unaware of this.

Fixing a disparity this massive will take time, but can be reversed with much the same approach as is being taken with the gender pay gap.

Companies are now being forced to be more transparent with CEO pay. The law needs to go a step further: make companies publish the pay/performance calculations for top, median and bottom deciles in the organisation, and then attach it to employees’ salary calculations, demonstrating the shortfalls at each level. That will at least let employees know how effectively they are being ripped off, and put pressure on HR to make sure their performance management system actually tracks um, er, performance.

In the meantime you could of course also print this article and ask your own HR department whether they could ever so kindly provide that analysis for you when the next pay review comes along.

Nick Henley is principal of The Difference, a culture change consultancy