Last 'Fat Cat Friday' (the date at which the earnings of a typical FTSE 100 CEO surpass the average annual UK salary), it was revealed that the CEO-worker pay gap has widened. The UK’s top bosses now make more in three days than a typical full-time worker will make in a year, according to research from the High Pay Centre and the CIPD.
Fingers were pointed at poor corporate governance and boards. Anyone, it seemed to me, except for the HR profession. But is this justified? Empirical research on the subject suggests otherwise.
A 2011 study conducted by the usually left-leaning London School of Economics is one example: it found that increases in CEO remuneration do, on the whole, match firm performance. However, these gains were not shared below C-suite level. Where CEOs achieved a salary increase of 3% relative to an increase in firm value of 10%, the average workers’ pay increases only came in at a paltry 0.2% – a staggering 15 times less (Bell and Van Reenen, 2011).
Then a July 2017 paper analysing whether CEO pay increases were excessive found that contrary to the authors’ own expectations CEO pay did correlate with firm performance (Cheng, Ranasinghe and Zhao). No clear problem there then.
Why then have some jumped to the conclusion that remuneration committees are to blame? Could there be something else, closer to home perhaps, that could explain the causes of this pay gap?
You certainly wouldn’t have to look far. While non-execs are mostly responsible for executive pay everyone else’s remuneration is left to HR. To understand how HR routinely manages to underpay staff by such vast amounts we need only look at the usual suspects.
The first of these is performance management. One paper found that the use of performance management actually exacerbated pay gaps (Davies, Mcnabb and Whitfield, 2015). Performance appraisals invariably reward people on some abstract concept of ‘performance’, where they are placed on a scale of one to five and often shoehorned into a bell curve, all to please HR’s need for fairness. Most of this is arbitrary and doesn't capture value added.
The second suspect is competencies. Despite these having been around since the 1960s and having been implemented in most organisations (and used for career progression), no evidence has been found that they add value. People lower down the organisation are thus judged more on these subjective and abstract criteria, whereas those higher up are judged on value-add and market comparables. If you’re trying to reward people for the fruits of their labour using competencies doesn’t make sense.
Finally we need to ask where HR professionals themselves have been when this redistribution of income has been going on. Where is the brave representative and voice of the employees every time the cash pot comes round? Who has been fighting employees’ corner on pay? Not enough of those in HR by the looks of things.
The HR profession has for years been criticised but the feedback doesn’t seem to be landing in some circles. The problem is that many are stuck in a Polyanna-ish world of make-believe, incapable of seeing any perspectives contrary to those taught in 1960s HR textbooks.
The systematic under-compensation of everyone below the C-suite is a scandal. If leaders truly want to do something about it then they must start by renovating HR.
Nick Henley is principal at The Difference, a UK-based culture change consultancy