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COMPENSATION & REWARDS
Jan 14, 2014

Pay fairness a complex – and contentious – issue

Executive pay levels grab headlines, but may not be employees’ top concern
    

By Claudine Kapel

What does it take to deliver fair pay?

The Canadian Centre for Policy Alternatives (CCPA) argues organizations need to tackle the widening gap between what top executives earn relative to the average worker.

In its latest annual CEO pay review, the CCPA notes that “just after lunch on the first official work day of the year, Canada’s highest-paid CEOs pocket what would take most Canadians all of 2014 to earn.”

The report, which examined 2012 compensation levels for the top 100 highest-paid CEOs, found these CEOs earned an average of $7.96 million, compared to the average Canadian income of $46,634. The CCPA based its tally on information from proxy circulars issued in 2013 for the 240 publicly listed corporations on the TSX Index.

“To put that in context, the average wage in Canada increased by six per cent between 1998 and 2012 while the average compensation of Canada’s highest paid 100 CEOs increased by 73 per cent during the same period (inflation adjusted).”

As a result, notes the CCPA, Canada’s top 100 highest-paid CEO’s had earnings 171 times higher than workers earning the average wage – up from 105 times more in 1998.

The differential between what top executives earn relative to the average worker has been the subject of long-standing debate. In Ontario, a recently defeated NDP bill sought to cap public-sector CEO salaries at $418,000, or twice the salary paid to the Premier, with some exceptions.

But pay fairness is a much bigger subject than just how executive compensation packages compare to the earnings of rank and file employees. And while executive compensation may grab more headlines, it likely doesn’t even represent employees’ top concern when it comes to pay fairness.

Employees are likely to be more concerned about matters that hit closer to home: the fairness of their own compensation relative to their peers or those at the same organizational level. Those in managerial roles may also be concerned about how their compensation compares to those of their direct reports, including what supervisors earn relative to unionized employees.

Pay fairness – or a lack thereof – at this more immediate or granular level can have significant organizational implications. While many debate whether pay is a driver of motivation, few would argue that “dissatisfaction” with pay can erode employee commitment, performance and retention.

So while you may not be able to resolve the larger debate around how much executives should earn relative to other workers, there are some immediate and concrete steps you can take to test the fairness of your pay practices.

An effective way to identify potential internal equity issues is to compare how individuals in the same job as well as at the same organizational level are paid.

That’s not to suggest everyone in the same job or at the same level should be paid the same. That’s not a requirement for fair pay. What’s key is to have a credible explanation as to why individuals are paid differently – such as differences in performance levels, experience, or time on job.

It’s when you can’t explain differences in pay levels that problems can arise. Issues related to pay fairness can fuel morale issues, erode trust in leadership and even prompt employees to seek opportunities elsewhere. In addition, concerns about pay fairness can result in employee complaints to regulatory bodies, including with respect to employment standards, human rights, or pay equity.

You can help keep pay programs running smoothly by making it a regular management practice to review the distribution of pay across individuals in the same job or in the same salary range and take corrective actions as appropriate.

In addition, clear pay administration guidelines and regular training for those involved in making pay decisions on how to apply compensation programs can help mitigate future issues.

While consistency of practice won’t resolve the broader and more societal questions about how we value work, it is at least a good place to start.

Claudine Kapel is principal of Kapel and Associates Inc., a Toronto-based human resources and communications consulting firm specializing in the design and implementation of compensation and total rewards programs. For more information, visit www.kapelandassociates.com.

    
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