Sunday, October 03, 2010

Some employers are more unequal than others

As John Rentoul and Sunder Katwala note, we’re inundated with party leaders who emote about the gap between rich and poor while having little to say about policies to address it.

Here’s a small suggestion: require organisations to publish, as part of their annual accounts, the ratio between the highest- and lowest-paid of their workforce.

This in itself wouldn’t force any changes in pay, but it would at least give us information about which employers produce the biggest inequalities. What’s more, those that like ‘nudge’ thinking may see this as something that could motivate change, if the media compile league tables and campaigners put moral pressure on employers to narrow their own pay gaps in light of social norms.

Perhaps as a second stage, once we’ve had some data to look at, government could offer tax breaks to those that have lower ratios. But let’s walk before we run.

And the lack of coercion may help such a policy’s political appeal: people may be concerned about massive pay inequalities but that doesn’t necessarily mean they want government-imposed salary caps. This policy would be a clear statement that the gap matters and that a rising tide really should lift all boats without any suggestion that the Chancellor should become every firm’s payroll manager. It’s not against success; it just want to encourage that success to be more widely shared. (If you like the kind of soundbites that only think-tank wonks can digest, you could call it ‘progressive aspirationalism’.)

It would also demonstrate that the biggest pay gaps by far are in the private and not the public sector.

There are plenty of practical questions about this policy, some of which have clearer answers than others. For instance:

Should all employers have to do it? I think smaller ones should be exempt from having to jump through the hoops. Individually, they have little social impact; collectively, there are so many of them that we’d be snowed under with numbers; and smaller organisations tend to have smaller gaps between top and bottom pay anyway.

Should bonuses be included? Yes, otherwise it’d be a way to play the system. Should benefits in kind be included? Likewise, yes.

Should the pay of external contractors be included? Yes, as many larger organisations outsource lower-paid functions like catering, cleaning and security, which artificially reduces their own direct payroll ratios.

How should we treat part-timers, people getting overtime pay, and people doing unpaid overtime?

Should we just look at the very best- and very worst-paid individuals or take, say, the top and bottom 5%?

Would it be worth breaking the ratio down into bottom-to-middle and middle-to-top as well?

Just thought I’d throw that out there…


Liam Murray said...

Big financial services firm, perhaps life & pensions, perhaps brokerage or investment services etc. They outsource most of the activity - from the canteen workers to the basic admin or call centre workers, all the way up to senior manager or head of level (say c.£100k). So all those employees belong to Capita or some such.

Consequently their lowest paid employee might be c.£150k pa and their highest 10 or 15 times that - their ratio will always trump that of a mid-size organisation without the power or scale to outsource their lower level jobs. Who gets the tax break?

I understand the impulse but I'm ihnerently distrustful of any government that thinks it's its business what private companies pay people. And I realise that applies as much to the coalition at the moment as it does Labour....

Tom Freeman said...

Sorry, maybe I wasn't clear: the idea is that you DO include the pay of a firm's externally contracted workers in the calculation for its ratio. Although I suppose that then raises a question of who to include in the ratios for the contractor companies.

(And given that income tax exists, it's already the govt's business what we all get paid.)

Liam Murray said...

Unworkable though - no firm is responsible for the salaries of it's externally sourced labour, couldn't possibly be; that's why they source it externally. Is Tesco responsible for the salary of the farmhands on the farms it sources eggs from?

Anonymous said...

Why aren't Tesco in some way responsible? The prices they pay dictate the wages being paid, and they will pick cheaper suppliers.

Very often the reason for outsourcing is to reduce the costs of labour. We all know that this is often through lower wages.

Liam Murray said...

'In some way' Tesco are responsible of course, as am I because I choose to shop there because their prices are cheaper (because, because etc.)

And that sort of illustrates the folly of Tom's argument - what appears to start out as a reasonable concern about pay differentials descends pretty rapidly into a debate about Tesco beans vs ASDA ones. The idea that you could frame any meaningful legislation around it is nonsense.

Tom Powdrill said...

Actually, the idea has just been put into effect in the US as part of the Dodd-Frank Act. At the risk of being hudely tedious, have a look at page 529 here:

Tom Powdrill said...

here's the actual blurb


(1) IN GENERAL.—The Commission shall amend section 229.402 of title 17, Code of Federal Regulations, to require
each issuer to disclose in any filing of the issuer described
in section 229.10(a) of title 17, Code of Federal Regulations
(or any successor thereto)—

(A) the median of the annual total compensation of all employees of the issuer, except the chief executive officer (or any equivalent position) of the issuer;

(B) the annual total compensation of the chief executive officer (or any equivalent position) of the issuer; and

(C) the ratio of the amount described in subparagraph (A) to the amount described in paragraph (B).

Tom Freeman said...

Tom, that's really interesting. I see they've not explicitly addressed the contractor issue - wonder how they'll handle it...

Liam Murray said...

My guess is if the US Congress can't frame 'the contractor issue' then most others would struggle to as well.

Also worth clarifying that term - in my original example, where a firm has outsourced administrative effort those people aren't in any legal sense 'contractors' for the firm. The firm signs a contract with a services company to delivers certain services and functions. The people who then provide those services are direct employees of that servicing company, not contractors for the original company.

And there's no "yeah but" here - those employees of the servicing company could be doing work for company A for the first 15mins of their day, then perhaps company B for a couple of hours etc. Legally & from a data protection point of view you wouldn't be able to tie the salary of individual A to that of individual Z in a separate company perhaps several orders separate from that persons employer.