Large pay ratios can demotivate staff

Organisations with a high ratio between the highest and lowest-paid employees may have lower levels of engagement and motivation.

Speaking in a panel debate at the Employee Benefits Summit on 25 June, Deborah Hargreaves, director of the High Pay Centre, said: “There comes a tipping point beyond which a high ratio begins to affect morale and demotivate [employees]. Academic work shows the lower the ratio, the higher employee motivation is.”

She added that, in the long term, this could lead to some destructive attitudes towards reward in an organisation. Therefore, it is important for employers to ensure staff understand the organisation’s thinking behind the ratio, what is happening with the ratio itself and how this has changed over time.

But while there are strong business reasons for identifying the ratio of the highest to the lowest pay level within an organisation, it is not always easy to calculate the ideal ratio.

Speaking in the same debate, Claire Morland, former head of compensation at Man Group, said: “What is the right pay ratio? It is difficult to know what the norm is in the first place.”

For example, some overseas employees could be operating in low-pay environments. Looking at executive pay within the context of an organisation’s wider pay practices and policies, therefore, is vital.

Hargreaves: “There is no perfect pay ratio, but it is a useful figure [for an organisation] to know.”

Roger Barker (pictured), director of corporate governance and professional standards at the Institute of Directors, added that there should be greater transparency around organisations’ pay ratios. “If investors demand this information, I don’t see why it shouldn’t be published,” he said. “In the US, pay ratios must be disclosed.”