Dear Chief Executive...

Dear chief executive,

Thanks for taking the time to read this letter. I’m afraid I’ve discovered a problem, but I have a solution for you too.

First, though, an apology. As your HR leader, I’ve steered you in the wrong direction in the past, especially when it comes to pay. Between us, we’ve contributed to one of this country’s biggest problems: rising income inequality. 

In the last few decades, incomes have stagnated or barely budged for most people, while doubling for those at the upper end of the scale.

This issue is on the radar of many of our key stakeholders, and pressure is mounting for change. The government is already raising the minimum wage and preparing a gender pay equity law. We now have to decide whether we let that pressure build and have more changes imposed on us, or act now by designing our own solution.

Over the last few years I’ve advised you to do two things that I now regret. Firstly, in the interests of fairness, I advised you to give everyone a cost-of-living pay rise that was as close to the annual rate of inflation as we could afford. Secondly, if there was anything left over, I suggested we look at our talent assessments and give a bit extra to those who were deemed a ‘flight risk’ or had performed well.

The first idea was flawed because those on lower incomes experience a higher cost-of-living rise than those on higher incomes. Lower earners, in short, face higher inflation. So for our people to ‘stand still’ in real terms, I should have been advising you to award higher cost-of-living pay rises to those on the lowest wages.

Meanwhile, giving anything leftover to the ‘talent’ had two problems. Firstly, these people were already on a steep career trajectory, never far away from the next step up. So it wasn’t a very good use of our remuneration budget. Secondly, they were usually at the higher end of our pay scales, and larger pay rises for them just compounded the growing income gap.

So what can we do about this? I would recommend three key steps to make sure we’re not exacerbating income inequality:

1. Become a Living Wage employer. It’s a positive, recognisable brand, and it will help us ensure that cost-of-living pay increases reflect the inflation reality felt by those on lower incomes. There’s good international evidence that staff paid the Living Wage work harder and quit less often, reducing our staff turnover costs. That’s why firms like Deloitte in the UK are among its biggest advocates.

2. Find out our pay ratio - the ratio between the highest and lowest paid in the organisation. Then decide if we are comfortable with it; and if not, decide what lower ratio would be affordable. The idea behind the pay ratio is this: Our company's success is thanks to effort from the whole workforce. If leaders are paid more, to keep a cohesive culture, our staff also need to be paid more to feel valued for their contribution. We can lift pay at the top, as long as we lift it at the bottom as well. I would recommend that we aim for a pay ratio of 10:1.

3. Given that we will need to find more money for cost-of-living increases at the lower end, those at the higher end will need to adjust their expectations accordingly. There will be salary compression over time. This could be a tough sell for some of our people. But we can design an HR strategy to retain staff by appealing to their intrinsic motivations - which the evidence suggests is far more powerful than pay alone. Dan Pink, for instance, has shown that what really motivates people is a sense of mastery, autonomy and purpose. This could be the basis of a new HR strategy:

   1. Mastery - There will be career development and professional growth opportunities across the organisation, backed up with tools and practices for our people leaders to support it on the ground. 

   2. Autonomy - We will go further than other businesses with our flexible work practice and coaching culture, ensuring people can be self-directed and well supported at work.

   3. Purpose - We have a stated purpose already as an organisation, and our people are energised by and committed to it. Being part of an organisation actively seeking to reduce pay inequality will generate extra motivation and pride among our people.

I’d like to thank you for coming with me as I’ve reflected on the damage our remuneration practice has done over the years. I would love to be part of changing how we reward and motivate our people. I hope you will lead the way for our business and set the new standard. I believe our business will thrive because our customers, investors and employees will value us for doing the work, leading the way and putting this right. 

Regards,

Gillian Brookes