Do Wage Ratios Matter?

Written by Tom Greenwood - September 6, 2017

A few months ago at the B Corporation retreat, I had the opportunity to facilitate a group discussion on the text, “The Ones Who Walk Away from Omelas.” In all honesty, I initially thought that this was a bizarre exercise, more fit for GCSE English Literature than a business retreat. But I went in with my mind open, curious to know where it would lead.

The group discussion took many turns as we asked ourselves some tough questions about what we thought of Omelas. How we would behave if we lived there? Do we already live in some version of Omelas? Do we think that it is a just society?

I learned a lot, but one of the most powerful lessons was an acceptance by all in the group of the hard reality that all of us, no matter how socially minded, will accept some level of social inequality. The question became not whether we accept inequality, but the extent to which we think that it is acceptable, in what forms it’s acceptable and under which circumstances.  This was an uncomfortable pill to swallow for a group of people who pride themselves in being progressive, caring and inclusive.

From Omelas to payroll

The Omelas discussion provided some very necessary perspective in other conversations at the event on the topic of wage ratios. I’ve been aware and somewhat concerned for some time that many large organisations pay their top staff salaries that are huge multipliers of their lowest paid workers. In the UK, the average pay ratio for a CEO of a large corporation is 84:1. That means that the CEO earns as much in six months as the lowest paid worker would earn in their entire career in that position. According to the High Pay Centre, the average FTSE 100 boss makes £1,000 an hour, accumulating the UK average salary of £28,200 in just three and a half days  This means that the average FTSE 100 CEO earns 401 times the salary of a minimum wage worker.

Of course, this is a personal opinion, but I struggle to believe that such income gaps can be justified, especially in cases where some workers do not get paid a living wage and when in many cases, CEO pay is not actually performance-linked.  Even if it is performance linked, we have to ask ourselves some hard questions about the metrics being used to measure performance.

What is a suitable wage ratio?

So the question is, what is an appropriate wage ratio for our business. As a small business, we obviously can’t afford to pay tens or hundreds of times the minimum salary. But there is still a difference and it’s an interesting exercise to review what that difference could or should be. Talking to some people in other companies, the consensus seems to be that somewhere in the region of 6:1 to 8:1 was a very low ratio and a good level to aim for.

This is certainly very positive compared with the ratios of typical large corporations, but for our business, it just didn’t feel right. Vineeta and I spent a lot of time agonising over this and in the end both concluded that in our gut, we didn’t feel that we could ever justify anyone getting paid more than three times the salary of the lowest paid worker. In reality, our wage ratio is much closer to two. If ever there was an exception to this, it should be based on real, documentable need such as differences in living costs due to location.

What is interesting about wage ratios is that they do not cap maximum pay, but simply link it with that of the lowest paid workers. Setting a maximum wage ratio for a business at a reasonable level, whatever that is, means that if the directors want to earn more, they have to take the rest of the team with them.

For example, if we have a wage ratio of three and employ people on minimum wage of £15,600 per annum, then my maximum possible pay as Managing Director would be £46,800 assuming that I take the highest salary, which is not always the case. As a certified living wage employer, our actual minimum annual salary is £16,477.50 or in London, £19,012.50 creating a maximum salary of £49,432.50 or £57.037.50 in London. To earn more, I would have to pay the lowest salaried team members more, which seems fair in recognising that everyone in the team is making a very real contribution to our success.

How much money do we need?

Now here’s where it gets really interesting. If we want to earn more money, we should really ask ourselves why.

In some cases, a person might have specific financial requirements for which they need to earn a lot of money, such as to pay for treatment for their sick child, fund a passion project or pay off liabilities. But for most people, there is little or no tangible benefit to earning a lot more than others. Most of us just want to be happy and research has shown that although more money does make people happier, the benefits tail off at around £49,000 per year, which is coincidentally 3 times the real living wage. At that point, we have enough money to live a comfortable life and have some fun. So earning more stops making much of a difference to our day to day life and our happiness.

I can testify to this from my own experience. When I reached the point in my life where I could comfortably afford a decent place to live, to eat good quality food and had a bit of disposable income, there was a noticeable drop off in how much better my life was as I my income increased.  Most of the good stuff in life does not actually cost that much and this is one of the reasons that I believe in relatively low wage ratios.

A change in culture

I was once criticised by a team member for not owning a nice car, a vicious slur against my 100% electric Renault Zoe, on the basis that it does not match my position in the business and is not aspirational for our team. But the criticism missed the point. Not only did it reflect much of what is wrong with our status driven culture, but the irony of it is that in reality there is more opportunity for people to fulfil their aspirations when wage ratios are low and the financial success of the business is more evenly spread amongst its staff. Far from taking offence, our low wage ratio (and my modest car) is one of the things that I am most proud of.

If earning more does not tangibly improve your life or meet a real need, then why not leave that money in the pot to pay other staff who do need higher salaries or even to create employment for more people?  If this principle was adopted by all businesses, we could make huge progress to reduce income inequality and unemployment, and no doubt give the economy a significant boost in the process. Instead of flaunting an unobtainable image of excessive wealth, management that implement low wage ratios are giving many more people the opportunity to live a good life and fulfil their own dreams.

With finite resources, reducing wage ratios is one of the easiest ways to create a happier, healthier business and society without anyone losing anything of true value.