Remuneration, what have you done?
HR’s uncomfortable contribution to inequality in New Zealand
HR practice often goes unquestioned when it comes to the annual remuneration round. The Leadership Team set the budget allocation for pay increases and HR goes about the practicalities and processes of distributing it according to a heap of obligations, customs and practices. Sometimes we test the theories by linking or decoupling performance and remuneration decisions. Either way, we know that neither of these approaches works perfectly for everyone and none of us has yet found that perfect sweet spot.
This annual remuneration cycle drives so much of HR's workload that it can sometimes feel impossible to stop, get our heads up and look back over the multitude of cycles to see what the cumulative impact has been.
I've started thinking about this recently and it's led me to quite an uncomfortable place.
I've taken a keen interest for some years now in the income inequality that has been making itself heard and felt in so many OECD countries. I've seen this play out in both the UK and New Zealand. Both countries have different contexts and challenges, but both are experiencing this long-term surge in inequality.
This graph shows the problem as it's been playing out for New Zealand’s disposable incomes since 1982.
The top ten percent of earners have enjoyed a much steeper disposable income growth than the stagnant growth you can see for our lowest income earners. There is also evidence that growing inequality is felt beyond income and manifests in other social and health outcomes. Those on the lowest incomes are more likely to experience poverty and the detrimental effects on health from conditions such as poor quality housing. The impact of ‘status anxiety’ created through a hierarchy based on people’s income, which in turn leads to low self-esteem, chronic stress and depression.
Most of us receive our income from the job we have. As an HR professional I started to consider the impact I might have had alongside my HR community colleagues in contributing to this socio-economic crisis that is unfolding in two countries so close to my heart.
Two things dawned on me.
Firstly, we in HR think about the cost of living increases when it comes to the remuneration round, based on how inflation was measured that year. We feel we are doing our duty if we can give everyone in our organisations something to keep their 'real' incomes steady, or as close to it as possible.
Secondly, if anything is left over we look to our organisation's strategy, policies and practice to find a way of dishing out the leftovers. We might recommend some one-off payments to those who have done something exceptional or try to retain our top talent by pushing them higher up the pay scale. Most of these extras are disproportionately going to the higher paid people who are more likely to be on a relatively steep salary trajectory through future promotions anyway.
What is the compounding impact of this remuneration approach on our society-wide income distribution problem?
How often have we stopped to think about the impact of the cost of living pay rises and how they might be felt differently by different income levels within our organisations?
The Australian Reserve Bank has researched how the consumer price index (CPI) affects different socio-economic groups in different ways. You guessed it, those on lower incomes are getting hit hardest, with cumulative inflation highest for the lowest income group. Statistics New Zealand found a similar trend here in 2016.
Thinking about it logically, if you're on a low income, the cost of basics such as housing, groceries and utilities takes up a large proportion of your income. When the costs of these basics, such as housing right now in New Zealand, is climbing faster than the standard 'basket of goods' then your two percent pay rise is unlikely to be enough to meet the coming year's demands on your basic needs. The lowest paid 20% in New Zealand now spend 51% of their income on housing costs. That’s up from 29% in the late 1980s.
Conversely, those on higher salaries getting a two percent increase will have enough, in nominal terms, to cover these basic needs. Although they might be taking a drop, in real terms, in their remaining disposable income, they're not in danger of losing the basics.
Combining this universal percentage pay rise approach with anything leftover from the pay pot disproportionately going to those on a relatively steep salary trajectory and you can start to see what’s been happening.
In any given year, these impacts might feel minimal and hard to detect. It’s the long-term, cumulative effects that are harmful. Because we in HR focus on one year at a time, this is the trick we’ve missed. We’ve not stopped to reflect back on what’s been happening, slowly but surely, over time.
It’s like the story about the boiling frog: tiny incremental temperature increases over a long period of time aren’t noticeable, until the frog finds itself boiling away.
As the impact compounds over a number of years (or even decades) it's no wonder there’s a growing gap between the lowest and highest paid in our organisations. And given we’ve all taken a very similar approach using ‘best practice’, we can see that there has been an impact across all our organisations, and therefore our society as a whole.
So, where to from here? What can HR do to address this uncomfortable contribution to a systemic socio-economic problem?
Well, the first thing is we need to acknowledge and better understand the part we've played. It's not something we've done all alone, but it is something we've sleep-walked into. Yes, it’s our senior leaders and boards who ultimately make the decisions about remuneration. It’s also fair to say that they look to us to wrap a process around it and offer advice and recommendations about how to make sound decisions. One year at a time, we feel we’ve been doing a good job, but we have not flagged this cumulative impact to our organisations. Not yet, anyway.
Now is the time to start that conversation. We can also start getting creative, coming up with new ideas and approaches.
This is by no means a cure-all, but here are some ideas for starters to get the conversation going:
We can look at the cost of living for the basics of housing, utilities and groceries. Think about the nominal price rise of these things for an average household and use that as a guide for what the minimum pay rise needs to be for people in our organisations. Use this instead of a bland percentage increase that might be making life a lot harder for our lowest paid people.
We can start thinking about the pay ratio in our organisations as a way of maintaining a deliberate connection between our highest and lowest paid people. We can start with a conversation with our leadership teams about what the right pay ratio should be. What culture do they want for this place? How could a pay ratio play into that? How does our pay ratio compare to other organisations? What do we want our lowest paid people to say about our organisation when we're not in the room?
Get a conversation going across the whole organisation about the way we value and motivate ourselves to do our best work every day. If we want everyone to have a fair share of the salary bill, then those at the top end might need to adjust their expectations. We can explore how people find intrinsic value from their work and what we can do to make even more of that than we do already. Dan Pink's work on motivation is a great starting point for this with autonomy, purpose and mastery being the key drivers to our human, intrinsic motivation.
Get a conversation going within the HR community and share our experiences and insights around this issue. By understanding how this is experienced and handled across our many and varied organisations, we will all be better equipped and prepared to lead the conversation we need to have with our leadership teams.
This is a confronting and uncomfortable proposition; we've inadvertently contributed to the inequality that is now a very real part of our society. It’s certainly been a difficult idea for me to begin to understand. However, the good news is that we can step up and take a leadership role to change this trend. We can now be part of the solution and make our organisations better places for all of us, which is something we will all be proud to have done.
Footnotes
The material wellbeing of NZ households:Overview and Key Findings from the 2017 Household Incomes Report and the companion report using non-income measures (the 2017 NIMs Report. Prepared by Bryan Perry, Ministry of Social Development, July 2017.
The Spirit Level: Why More Equal Societies Almost Always Do Better. Richard G. Wilkinson and Kate Pickett. London, Allen Lane, 2009.
Does income inequality cause health and social problems? Karen Rowlingson. Joseph Rowntree Foundation. September 2011.
https://www.rba.gov.au/publications/bulletin/2014/mar/4.html
The material wellbeing of NZ households:Overview and Key Findings from the 2017 Household Incomes Report and the companion report using non-income measures (the 2017 NIMs Report. Prepared by Bryan Perry, Ministry of Social Development, July 2017.