How to create shared value
Shaping the Future

Why the earnings gap is widening - and how you can stop it!

Have you ever wondered why the pay gap is widening? Let me show you.

According to the UK Office of National Statistics Annual Survey of Hours and Earnings the average earnings in 2010 were £26.500 and the average bonus was £1,020. Simple arithmetic therefore tells us that the average pre-bonus earnings would have bee £25,480 which means that the average bonus rate would have been 4%. 

There are no readily available figures for middle managers, but let us assume that your average middle manager earns twice the average basic wage. That would be £50,960. Let us then assume that the manager gets a 10% bonus. His earnings would then increase to £56,056.

Now let us look at executive pay.  According to Will Hutton the remuneration for FTSE 100 Chief Executives is 88 times the UK average wage. That would make the average CEO pay packet £2,332,000. I have no idea of the breakdown of those figures but based on a recent news report that the CEO of Lloyds TSB is getting a bonus of 225% on a salary of £1 million let's create a little table.

Let's be conservative and say then that the average base earnings for middle managers is double that at £50,960. And assume that the average CEO base salary was £1.1million and the average bonus rate was 112%. (Half that of the bank executive.) Then a table of earnings would thus look something like this:-

2010 Average Earnings 
Remember those averages include everyone in the workforce. That means they include the chief executives' earnings. Without those the averages for regular employees would be considerably less.  Also remember that the higher bonus percentage is against an already large base. It is no wonder the earnings gap is widening to such an alarming extent. It may also go a long way towards explaining why employee engagement is such an issue. And, furthermore, one that is unlikely to go away until this earnings disparity is addressed.

This problem is easily solved. You can see for yourself when you look at an equivalent table using my human asset valuation and labour dividend concept. 

2010 Average Earnings with labour dividend 
Obviously, the higher earners will lose out relative to their current incentives, but their rewards are still generous and not insignificant. In this example the chief executive's dividend is still more than twice the price of an average house. In any case the lower incentive will to some extent be compensated for by:-

  • The more equitable distribution; 
  • The greater consistency in the method of determination; 
  • The reduced need to justify the bonus;
  • Better results as a result of the greater team effort of the organisation as a whole.

It will also reinforce their need to increase their human asset value, and thus reinforce the whole model.

So that is how you can close the earnings gap. And at the same time create no-cost-employee ownership and address all you employee engagement problems and transform your bottom line results.  

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