The basic pay gap continues to widen between top management and the lowest paid employees. The total remuneration gap is much wider when share packages, pension and other benefits are considered. The size of the gap attracts controversy but at times becomes confused with adversity against wealth creation. The latter is needed to enable the nation to prosper and afford schools, hospitals etc. and allow businesses to reinvest in developing new services and products to remain profitable. The issue of top managers’ pay is vexed and requires focus by companies to restore a sense of proportion. Sir Stuart Rose was recently quoted as commenting that, “There is a responsibility on all companies to look at the the quantum of pay and the relationship between the top and the bottom. They need to be able to justify to their employees the reason people are being paid the sort of rates they are being paid.” *

Relationship between top and bottom basic pay rates?

The debate continues as to whether the salary of senior managers should be linked to that of the lowest paid employee. The focus has been upon the multiplier to be used but that misses the point. If a pay structure is to be effective, employees and managers at all levels must sense that the differentials are fair and reasonable. The latter does not mean ignoring market rates of pay as employees usually understand that market rates affect salary rates. Shareholders also need to believe that the level of senior management rewards is reasonable.

The idea of equitable pay differentials or pay equity is not new as it was put into practice in the 1970s**. Then, it was mainly academic consultants who observed the need to develop equitable pay structures especially in large organisations in the private and public sectors. Several of those advocates devised their own proprietary job evaluation systems which unfortunately took the spotlight off the pay equity principles that had been developed. Those principles are worth revisiting today.

• A multiplier of pay may be helpful but it needs to be derived from a logical and equitable pay structure if it is to be seen as fair. That does not require an elaborate, complex method but a relatively simple framework to check the differentials between the top and bottom and the different levels.
• The basic pay line of a company (known as the pay curve) is not a simple straight line running from the minimum to maximum pay range. In practice, the pay curve of an organisation may have several different slopes reflecting the various professions/trades within the firm. Hence, a straight multiplier may give a false result.
• Market rates of pay also influence pay curves; ways of providing for market rates without distorting the basic pay curve need to be implemented. For example, the use of market supplements will enable competitive rates to be paid without distorting the differentials***. Pay curves vary between industries and those differences need to be recognised

Equitable Pay Differentials

To promote a sense of pay equity when setting senior management levels of pay, a multiplier should be based on an equitable pay structure taking account of the factors above. Consultant academics such as Dr T Paterson conducted research into pay equity and used the Paterson Plan of developing pay bands. The method was subsequently renamed as the Decision Band Method but its underlying principles of pay equity provide a logical basis for developing a pay curve and deriving a multiplier from the lowest to the highest pay band

A key question is whether the multiplier will be linked to basic pay or total earnings. The packages of senior managers often contain a high percentage of incentive rewards. Those may take the form of deferred share plans or a mixture of cash/shares on a deferred basis to encourage managers to focus on medium term growth and returns. This fact needs to be taken into account when determining a salary multiplier or ratio.

One option is to assess what should be the basic pay level of senior managers using a pay curve. That can then be used to fix the multiplier or ratio for basic pay. A performance related plan can then be added that is both transparent and challenging. Market comparisoin will also indicate whether the total remuneration package should include other benefits. The key though is to understand the pay curve(s) within the organisation so that a multiplier is based on a logical pay structure and not just a whim as to what multiplier shoud be used.

Sources:

*   The Sunday Interview by Kamal Ahmed, The Sunday Telegraph March 25 2012
**  Pay, for making decisons, T T Paterson, Tantalus Research 1981
*** Market supplements see our earlier post - Link to be revised

© 2012  HR Management Dimensions Ltd.

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