High pay differentials can lead to low staff morale

Businesses in the UK with a big pay gap between the highest and lowest earners experience more industrial disputes, sickness absence and staff turnover than those with more equitable pay differentials. The authors of a recent report from the High Pay Centre, an independent think-tank, assert that while the pay gap is frequently debated in moral terms, these findings show there is an economic and business case to be made for more equal pay distribution within organisations.

Background

On 20 January 2014, the High Pay Centre published a research report on pay differential in UK businesses. The report, The high cost of high pay: an analysis of pay inequality within firms (580 KB PDF), argues that workplaces with the biggest differences between the highest and lowest paid employees have higher levels of industrial disputes, increased sickness absence and a higher staff turnover.

The High Pay Centre describes itself as ‘an independent non-party think tank established to monitor pay at the top of the income distribution and set out a road map towards better business and economic success’.

The research for the report was undertaken by academics from the Centre for Equality and Diversity at Queen Mary, University of London. The research used data from the Workplace Employment Relations Study (WERS) 2011 (3.5 MB PDF) (UK1310019D). It compared indicators of employee discontent, well-being and engagement commitment in workplaces with varying levels of pay inequality.

WERS 2011 involved face-to-face questionnaire interviews with 2,680 managers, shorter face-to-face or phone questionnaire interviews with 1,002 union/worker representatives, and a self-completion survey of 21,981 employees.

Key findings

The research found that workplaces with more unequal pay scales experienced higher levels of discontent and lower levels of employee well-being, while the results for employee engagement were ‘more complex’.

Discontent

The report’s authors argue that a larger pay gap between high and low earners is likely to lead to more workplace conflict. In workplaces reporting one incidence of strike action, the average ratio between the highest and the lowest earners was 10. In workplaces where there had been more than one strike, the ratio was 12. In those workplaces where no strikes took place, the average ratio between the highest and lowest earner was just 5.

Higher levels of staff turnover were also found in more unequal workplaces. In workplaces where at least five workers left the organisation in the previous year, the pay ratio between the highest and lowest earner was 7, whereas in workplaces where fewer than five workers had left the organisation within the past year, the pay ratio was 5.

Employee well-being

Workplaces that had larger pay gaps also exhibited higher levels of work-related illness. The pay ratio between the highest and the lowest earner in those workplaces reporting no work-related illnesses was just 5. In contrast, in workplaces where managers reported at least one case of work-related illness among the workforce in the last year, the ratio between the highest and lowest was 8.

Employee engagement

The research does suggest that there are some gains to be found in terms of employee commitment and job satisfaction arising from the ‘incentive’ provided by a degree of pay inequality. However, these are lost beyond a certain inequality threshold – where the highest earner within an organisation is paid more than 24 times the lowest paid.

Across all workplaces, businesses where employees registered high commitment to their job had an average pay ratio of 8 while those with low commitment had a pay ratio of 6. Workplaces where employees reported high job satisfaction had an average pay ratio of 8 while those with low job satisfaction had a ratio of 7.

However, when looking at the 5% most unequal workplaces – those with a pay ratio of 24 or above – the difference in average pay ratios for workplaces reporting high levels of satisfaction/commitment and those reporting low levels was negligible.

Policy implications

The authors of the report conclude that

while the growing gap between top earners and ordinary workers is frequently debated in moral terms, these findings also demonstrate that there is a clear economic and business case for more equal pay distribution within organisations.

They see their findings as ‘an important step in challenging current thinking and practice around reward strategies in the workplace’. And they go on to say that businesses and policymakers should be made aware of the capacity of unequal reward structures to distort organisational goals.

Commenting on the research, High Pay Centre Director Deborah Hargreaves said:

High executive pay is not only frequently unmerited, but has a huge hidden impact on the rest of the organisation and society as a whole. Whether it’s through staff turnover, sickness, low morale or industrial action, big pay gaps undermine employees’ loyalty to the company and their managers.

She added: ‘Employers suffer lost productivity, have to pay more sick pay and legal and recruitment costs as staff left feeling the financial and emotional strain are driven even further into the ground.’

Mark Hall, IRRU, Warwick Business School

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