impact

What you’re not being told about the pay gap Pay inequality has been one of the most controversial public issues since the economic downturn. Research, books and protests have kept it in the front of people’s minds and in the headlines. But we think that a lot of what’s being said is interpreted in ways that aren’t helpful or meaningful.

We think this comparison is over-simplistic. It doesn’t explain why the disparity is happening. So we’ll look at the long-term trends behind it and explain some common misconceptions. We’ll also share exclusive Hay Group research to show you the global changes in pay disparity in the last 6 years, so you can see the worldwide picture. To get to the bottom of the pay gap, we compared the salaries of a senior manager and a lower-level employee in 2008 with 2014 to see where the gap is growing or closing. Finally, we share some advice on handling disparity as an issue, and how to develop the skills and talent you need in your workforce to navigate the pay gap.

Shape problems

will have much lower disparity, but may have CEOs who earn far more than in a manufacturing company. To put it another way – if a company is entirely comprised of people earning in the top 1 per cent of worldwide pay levels, their CEO automatically looks more ‘equal’ than a company who employ people earning a broader range of wages. This simple illustration shows the typical numbers of people at each job level for a retailer and a professional services company. Company A Retailer

Wages low to high

One of the most common methods of illustrating inequality is to show the increasing disparity between how much a CEO is paid and the average wage in the company. That disparity is even more striking if you compare it to the lowest earner in the company.

Number of people

One of the main reasons why the disparity can be misinterpreted is that it partly relies on the shape of the company.

But a company that doesn’t have that manufacturing or service level of employment will have lower disparity, even if the CEO earns more. So a company that has fewer people, but primarily hires skilled people (like a consulting firm, a law firm, or even an investment bank)

Wages low to high

A company that employs more people at a lower wage will have a higher disparity, especially if it’s multinational and working in markets with lower wage costs and lower cost of living.

Company B Professional Services

Number of people

Figure 1: Company A will appear less equal than Company B due to its shape.

did you know: senior managers are now overseeing twice as many managers as they did six years ago.

Long term view

Percentage increase

Looking at Figure 2 below, it’s clear that wages are rising proportionally faster for jobs that are at a higher level. And so close to the recent worldwide recession, it’s understandable that information like this can provoke an emotional response and be easily misunderstood.

14 13.8 12 10

earn less that those in mature markets (due to lower living costs), which can then in turn affect wages in the home markets. It’s also led to companies becoming far larger, especially when mergers and acquisitions are taken into account. Bigger companies mean bigger responsibility for the top executives. n

8 7.4 6 4.7

4 2 0 Salary levels

Below $100k

$100k to $250

Above $250

Digitization has led to some jobs being simplified (or automated), but it’s also led to a boom in the need for professionals to design and manage the global systems. It’s made it easier for companies to be global, with improved communication.

The combination of these two factors has led to start-ups being able to reach global audiences without the need for large numbers of people on the pay roll, but it’s also led to large corporations becoming more and more complex. Over time, we’ve seen higher level managers responsible for more and more people. So in many large corporations, more is being done with less, which has contributed to pay being increased at the top end of the scale.

Figure 2: Percentage increase in pay, 2010 – 2014, US. Data drawn from Hay Group PayNet.

But this isn’t purely a post-recession issue. These are trends that have been building for the last 30 years. And it’s been happening during years of economic prosperity as well as during recession. So why has this been happening? We believe it’s down to two of the global megatrends shaping the world of business today. n  Globalization

has opened up new markets and workforces. In emerging markets, employees often

SHORTAGE / PAY PRESSURE OVERSUPPLY / WEAK PAY PRESSURE DEMAND

SUPPLY

High

Low

Skill level

High

Figure 3: Illustrating how demand and supply lead to pay pressure. 2

What skills are needed? Part of the issue is the increased need for more skilled people to keep up with changes in technology and globalization. At the same time, jobs that are routine and unskilled are being left out in the cold as they become less and less important – or completely redundant. There’s a shortage of people with critical skills (like emotional intelligence, advanced situational judgment, creative or lateral thinking, or the ability to solve unprecedented or unusual problems). Because of supply and demand, people who need these roles filled will pay more for them. But it’s not just bottom-level roles that are being wiped out. Many former middle-management ones, such as legal executives or accountants have found the same end. What we’re actually seeing more and more of is the ‘hollowing out’ of companies. Due to fewer middle-management roles, higher level managers are seeing more complex work and responsibility than in past years. And the people that are able to deal with this responsibility are harder to find. Previous Hay Group data shows the ‘span of control’ of senior managers has considerably increased over the past few years.

Types of job in decreased demand

Types of job in increased demand

Retail cashiers >

< Engineers

Accountants >

< Doctors

Office clerks >

< Creatives

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did you know: of the countries we looked at, two thirds have seen a rise in the pay gap.

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Figure 5: Changes in pay disparity between 2008 and 2014. This data was drawn from Hay Group PayNet.

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What we looked at

What we found

We’ve looked into some of the trends which explain why the pay gap is growing, but we wanted to look more into the facts to understand if disparity is growing or declining, and see where it’s happening. One of the advantages of our database is that we have constant and consistent ways of measuring ‘seniority’ globally.

n The gap in pay between senior and lower jobs has indeed

Here’s what we looked at: typical pay for someone paid on the lower end of the scale – not the absolute lowest, but a couple of steps up from there. This might typically be a skilled manual worker, a production supervisor in a factory, or a new graduate entrant to the workforce. We looked at the median base salary in the market for jobs at this level.

n The

n We also looked at typical pay for a relatively senior

worker – again, not the absolute highest, but a few steps down from the CEO. This would typically be a senior department manager (e.g. head of finance, or head of sales), often at the level where people first start to be called ‘head of’ something. Again we looked at the median base salary in the market for jobs at this level.

n We divided the senior manager salary by the lower level

worker’s salary. This gives a number which answers the question “how much more does a senior manager earn, compared to a lower level worker?”

risen since 2008.

n Of the 63 countries we looked at, two thirds have seen a

rise in the pay gap. The other third has seen a reduction in the pay gap.

n In the countries where it has risen, it’s risen by about 20

per cent on average. Where it’s fallen, it’s fallen by about 5 per cent.

What’s behind the data? Most of the reductions in the pay gap have happened in Europe. Strong labor unions have led to pay rising for lower level jobs, while tax rates mean there’s little incentive to raise senior manager pay. In some cases, lower level pay rises are happening despite stagnant productivity and company earnings. In fact, Europe has seen the lowest levels of overall growth. This means pay increases are unlikely to continue forever, as they’ll become increasingly unaffordable. And as long as there’s less money coming in, pay increases may mean that there’s less ability for these companies to create new jobs. It’s a difficult trade-off in areas of higher unemployment.

n We then compared this number now, to the same

number in 2008, to see if the gap in pay is getting bigger or smaller.

How to navigate the pay gap

1

Be transparent: Explain your pay policies and get on the front foot to explain the underlying trends at work.

2

Be realistic: Be aware of the changing demands on your workforce, and plan for them. Look at strategic workforce planning.

3

Be clear: Speak openly about the skills that you need and the skills you expect you’ll need in the future. This doesn’t have to be confined to your company – there may be a need for this on a national or international level, especially when it comes to training young people.

4

Train in work: Consider how skills can be taught in work. From our research, this is particularly needed with young people. In many cases, they haven’t yet learned the ‘soft skills’ needed in the workplace. We shared our findings on this here.

5

Invest in development programs: Build up a talent pipeline. Our Best Companies for Leadership study shows that the best companies develop these skills internally (and promote from within), which is both cheaper and more reliable than going to the market. This can take the form of placements in different areas to learn more diverse skills.









For more exclusive research, data and insights on developing and rewarding your people, visit us at: www.haygroup.com. To subscribe to future issues of IMPACT, sign up here.

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