Why everybody hates you: Income inequality

Reputation is formed from three main components: your own behaviour, the manner in which the behaviour is communicated, and the context in which that behaviour takes place. The first of these you can change, the second you can influence but you need to understand the third – context – in order to do either of the others well. Many of the issues that affect your reputation are exceedingly complex. Race, gender, inequality, climate change – how can you possibly be expert enough in each of these areas and more in order to stay ahead of your critics and be (seen as) a good company?

This essay is the first in a series that explains the context in which your corporate reputation is being formed, so that you can guide your own company safely through. Today we’re looking at income inequality. Bonuses, big pay packets, and golden farewells all represent reputation risks. But why is it such a big deal? TLDR: since the financial crisis of 2008, concern about poverty and inequality have risen. Simultaneously, corporate behaviour has aggravated ill will. It is a toxic combination. At the end I’ll share some further resources if you want to go deeper into the topic, and start to show you how to think about these issues and how they relate to your reputation.

Poverty and public opinion

Confusingly, levels of poverty in Britain are actually roughly static. The Social Metrics Commission (which is trying to create better measures of poverty) found that for the past 15 years the overall poverty rate has remained relatively stable, fluctuating between 21% and 24%. Despite much debate, fact-checking charity Full Fact, confirm that this is also about average for the EU. So why the change in public attitudes?

First, while the level of poverty at population level has stayed steady, the type of people experiencing poverty has changed. Pensioner poverty has declined markedly, and while relative child poverty has fallen slightly, population increases mean that absolute numbers of children in poverty are rising. Analysis by the Resolution Foundation predicts that relative child poverty is also due to rise. At the same time changes to the benefits regime for disabled people garnered swathes of negative publicity about the hardship that was caused to this section of the population.

[Photo by Bruno Aguirre on Unsplash]

Meanwhile, the Brexit referendum reassured Britons who previously felt that it was too easy for migrants to come to the UK and claim benefits. The overall result has been to shift discussions about poverty from an emphasis on the “undeserving” to the “deserving” poor. Bluntly: away from migrants and ne’er-do-wells and towards children and the disabled.

The second big factor in evolving public attitudes has been visibility. Political discourse increasingly presents poverty and inequality as a pervasive and growing problem. Theresa May spoke frequently about inequality and the Labour Party has focused on this theme more and more, with Jeremy Corbyn calling the scale of poverty in Britain “a national emergency”. The media coverage has followed a similar trajectory: one study contrasted topics covered by the media in 2001 and 2011 and found a 45% increase in coverage of poverty in four mainstream newspapers. And while population-level income statistics may tell a story of static poverty, visible measures such as homelessness and food bank use are more visceral, more Dickensian, and tap into our moral sensibilities – and these measures are on the rise.

The result has been a significant shift in British views on poverty. The British Social Attitudes survey found that compared to 2006, we are 13% more likely to think that there is ‘quite a lot’ of real poverty in Britain, 30% more likely to think that poverty is increasing, and 18% more likely to think that poverty levels will increase in the next decade. Due to the political landscape in the UK, these increases have been especially large amongst Labour Party members and voters.

Compare and contrast: Corporate compensation

Why is this relevant to our discussion about corporate reputation? Because context is everything. In a world where everyone is on the up, high pay for high performance is much more palatable. But, conversely, while 62% of Britons think that poverty is increasing, the corporate world is busy shooting itself in the foot.

Yes – the coverage is often skewed and sensationalised. Problems are clear the moment you look at the data: for example, most of the evidence stated in media coverage about high pay compares the salaries of chief executives at FTSE 100 companies with the salaries of the average UK worker – rather than the average salary of a FTSE 100 employee. But these are still the numbers that the public sees and, even bearing in mind the limitations, the comparison is striking. The mean salary of a FTSE 100 CEO in 2017 was ￡5.6m, while the mean of their employees’ was ￡38,516. Eleven chief executives earned more than ￡10m that year. Average full-time salaries for all companies in the UK rose that year by 3% (from ￡34,414 to ￡35,423), while the chief executives’ rose by 11%.

Of course, it is the highest numbers that hit the headlines and in the financial year ending 2018 the highest paid was Jeff Fairburn of Persimmon plc. He received ￡38.97 million (down from 2017, when he took home ￡45.74 million), or 1,318 times the median salary of a full-time UK worker. Across the whole FTSE 100, for every ￡1 an average employee made in the year ending 2018, the average CEO made ￡72. Only 33 of those top 100 companies is accredited by the Living Wage Foundation.

[Photo by Bagus Ghufron on Unsplash]

Was it always this way? Perhaps we are just more aware of the inequity now? In fact, the coverage here is spot-on: the difference in pay between the lowest and highest paid has been increasing. The Economic Policy Institute in the US, found that in 1965 the CEO-to-typical-worker ratio was 20-to-1. From 1978 to 2018, CEO compensation grew by 1,008%, while worker wages grew by 12%. This research also notes that CEOs (about whom we see all of the coverage) were over-compensated even by comparison with the rest of high earners (poor things) – whose wages grew by 339%.

When you take a step back and look at the top 1% of earners (people earning more than ￡160,000), the scale of the trend becomes clear. This small group of individuals now receives 14% of the total income earned in the UK – up from 7% in 1981. Even though these gilded few pay hefty tax bills, the other 99% is still left wondering whether a smaller wage packet for company leaders could mean more to go around elsewhere.

The ever-useful British Social Attitudes survey asks Britons whether “the gap between those with high incomes and those with low incomes is too large, about right, or, too small?” Currently, more than three quarters (78%) say that the gap between those on high and low incomes is too large, while almost everyone else (16%) thinks this is about right. This has stayed pretty much the same since 2006 and researchers believe that’s because the indicator is already so high that there is little opportunity for increase. So let’s try another approach: respondents to the European Social Survey (details here) are asked the extent to which they agree or disagree that “Large differences in people’s incomes are acceptable to properly reward differences in talents and efforts.” Between 2008 and 2016, agreement with this statement amongst UK participants fell by 11%.

In 2017, after a proposal by Jeremy Corbyn that executive wages should be capped, ComRes conducted a poll for The Independent asking Britons which of these two statements was closer to their view:

• “It is up to employers how much they are prepared to pay their staff and the Government should not try to set a limit on it”
• “Government should encourage companies, through measures like taxes and government contracts, to cap bosses’ salaries at a maximum of 20 times the company average”

57% agreed with the concept of government intervention, 30% didn’t think this was something Government should limit, and 13% said “don’t know.”

Wealth and worth

[Photo by Annie Spratt on Unsplash]

In March 2009, Kate Pickett and Richard Wilkinson published their iconic and somewhat controversial book The Spirit Level, in which they demonstrated strong links between levels of inequality in a society and a series of horrifying outcomes such as shortened life expectancy, teenage birth rate, violence and poor mental health. Many of these links have been strongly challenged by their critics and you could spend many hours (or possibly lifetimes) trying to get to the bottom of the debate – if you fancy a go, there are links in the resources section to get you started. Either way, The Spirit Level remains the seminal book in this field and while their final conclusions are up for debate, the part that is most interesting for us right now is a building block that gets laid before the statistical analysis: that inequality damages our health and our societies because it impacts our self-worth.

Humans are social animals, goes the theory, evolved to experience strong emotional and hormonal responses to social stimuli. The most important of these is shame, which can vary from slight awkwardness or feeling foolish through inadequacy and on to exposed, defective and insecure. In traditional societies, shame acts as a powerful tool for group cohesion, helping us conform and stay safe within a tribe. The stressor of shame is counteracted by feelings of self-worth that come from our tribe understanding our skills, assets and features. When you lived in one small village for your whole life, neighbours knew you to be conscientious, kind or funny. Your reputation was balanced across a huge number of minutiae that the other members of your community knew about you.

Then the structure of our societies evolved. As we have left our villages and become more mobile, less connected with the people who knew us in our youth, we have had to make judgments about our fellow humans based upon fewer points of data. The more unequal the society in which an individual lives, the greater the importance of that judgment – because status makes a bigger difference to your life chances.

It has become fashionable to talk about the dangers of chasing online likes and ratings. We fear the impact of such direct feedback and document the stress this creates for young people, in particular. But the truth is that wealth is the original, universal rating system. Everyone in the UK understands what a pound is, everyone knows their own income – and we constantly come across coverage of the incomes of others.

Untethered from social systems that give us positive feedback for other attributes, the human brain seeks validation and – for most of us – sees that our ‘worth’ is far below the numbers we see in angry headlines. We are programmed to find this shaming, to feel our social status is assaulted. This in turn makes us defensive and angry. This dynamic is especially poisonous when the only facts most of the public hear about the wealthiest of their fellow citizens are about dishonesty and unethical behaviour.

This accords with what we observe in focus groups: when highly paid individuals are raised in a discussion the group swiftly allocates these particular rich people as ‘deserving’ or ‘undeserving’ (sound familiar? All humans are pretty similar really). This is often decided by whether we can understand the work that they do and/or the social value that they create. If the individual in question is consigned to the ‘undeserving’ pile then the group quickly moves on to suggest that their wealth is the result of dishonesty, corruption or an unfair system of rewards. “They must be very greedy”, “They should be locked up”, “Of course, they don’t pay any taxes”.

The impact this has on corporate reputation

The financial sector provides a useful case study in which to consider the impact of this phenomenon on corporate reputation. Over the past decade I have spent a lot of time talking to the public about what they think about banks and bankers and not much of it was positive. Each new year would begin with an attempt to reframe bankers’ bonuses. Clients wanted to know how to talk about bonus season so that the public would understand that the payments were necessary. Here are some of the preferred arguments and the common focus group responses:

We have a contractual commitment to pay these bonuses

You shouldn’t have committed to pay such ridiculous sums. Also, shouldn’t bonuses be for good performance?! We’re in a recession because of you lot.

First, let’s note that even in 2014, the public were still telling us that the country was in a recession caused by the banks – despite years of recovery. Where there is inequality it is necessarily true that experiences of the economy can vary wildly between different income groups. This makes it harder for companies to make arguments about the dividends of economic good times being shared.

For the sake of brevity, I have steered clear from non-income inequality in this article but it is worth noting here also that the idea of a bonus being something contractual, rather than a one-off or token gesture, is very hard for most people to comprehend.

Finally, time and again I have heard outrage that bankers get bonuses when the public believes they are doing a bad job. This brings us back to the idea of deserving and undeserving rich. The vast majority of Britons reading about “bankers’ bonuses” have little idea what it is that bank employees do to earn their money and few measures for assessing their competence. The only time they hear about banks it is bad news: scandals, bank closures, data breaches, computer glitches. In this context, it would be hard to justify a bonus on the grounds of exceptional performance.

We have to pay this kind of money otherwise the good people would go and work elsewhere

Like where?!

[Germany, Paris, New York]

Don’t be silly, no one is going to move that far, even for more money

[Even for several million?]

And leave their families? They must just be really greedy and we don’t want people like that running the banks anyway. Good riddance. Can’t we just get some maths graduates to do the jobs? They’d probably be better at it, some whizzkids, and do it for less.

This conversation – which I have had on many, many occasions – is indicative of both the gap in understanding and the total mismatch in expectations between individuals earning high and average pay. The numbers seem so large as to be almost fantastical, so the average person concludes that there is no way that this could be a proportionate reward, therefore bankers must simply be overcompensated and “really greedy”. The lack of understanding of the skillset required also gives people the confidence that these greedy bankers could be swiftly and simply replaced by a twenty-something graduate. In fact, the ‘whizzkids’ might be better if they are less driven by high bonus payments.

These fingers aren’t just pointed at banks: charity CEOs – in fact, any CEO! – have also come under fire. And no amount of explanation that the full compensation package includes their pension, car allowance and the shares that were agreed at an especially low point in the market but now have blossomed is ever going to make ￡40 million, or ￡60 million or ￡70 million seem like a justifiable value for the efforts of one person. Especially when others in same organisation are earning less than living wage and having to scrub loos every day. Increasingly, shareholders seemed unimpressed as well with revolts against high pay in many major companies. Remember Jeff Fairburn, our highest paid CEO? He had to step down from running housebuilding firm Persimmon after his ￡75 million bonus caused public outrage.

Why should I care?

The public are not only (for many companies) your customers, they are potential employees, investors, sources of testimonial and recommendation. They are also the constituents of MPs who define the legislative and regulatory environment in which you work. A poor reputation leads you directly into all kinds of medium-term commercial hot water: rising recruitment costs, falling market share, and cross investors.

Poor corporate reputation is also a source of immediate existential threat. If you need more convincing, perhaps ask the energy sector as they struggle to process the new price cap, or the financial sector that has had to entirely restructure as a result of ring-fencing. These interventions by politicians were put in place to tackle practical problems, yes, but the impetus to tackle those problems now and in the way they have done came from public perceptions of market failure. As you can see above, those perceptions are intimately interlinked with income inequality.

This debate has wide-ranging impacts beyond even one company or sector. When I worked on the Remain campaign during the Brexit referendum we heard from ordinary people across the country (even people who agreed with us) that corporate threats to move abroad were ‘”typical of the fat cats” and weren’t trusted as a proxy for how Brexit would affect normal citizens. The concerns of corporate leaders were believed to be so far removed from everyday life that even when these companies were major employers, the public didn’t believe that they had the country’s best interests at heart. That fact had a big, big impact on the outcome.

What to do about it? Three key points to consider

In future articles I’ll talk far more about the behaviour and communication that drive reputation and we'll delve into how organisations can navigate these tricky issues. Subscribe here if you want to be sent my articles as they appear each Wednesday. For the time being, these are my three key takeaways on this issue:

• When low pay is (or appears) prevalent, there are more people for whom high pay seems an impossible sum and more people who will be asking “How can anyone really deserve that much money?” This appears obvious – but if you look at the way in which corporate remuneration is handled, it is evident that few companies have really taken it on board.
• To give yourself the best possible chance of communicating successfully on this issue purpose is key: if you can show that you have a worthwhile purpose and demonstrate progress towards that, rewards seem far more justified. Conversely, if your competence in doubt – you appear far less deserving.
• Purpose is also important because it helps to demystify (a little) what a company or individual does. Too often firms hide behind aggregate numbers to protect privacy or simply so they do not have to explain and when the public don’t understand what you do, it is impossible to accurately assign value. There are some rare individuals who are deemed ‘deserving rich’ who we decide are smart or beautiful or worthy enough to have earned their riches – but unless you look like Kate Moss you had better start explaining to the world why your backstory makes you as appealing as ‘upstart’ Richard Branson, or as brainy as Bill Gates. Describing the role and commitment of key team members holds the potential to humanise and justify high reward.

Resources

This essay is a starting point that will equip you to understand the debate about income inequality and the role it plays in your corporate reputation. There is much, much more to this conversation. What have you read that cast a light on this? How have you tackled this problem in your organisation? I’d love to hear more from you and will add reading suggestions to this resources list so it can improve over time.

Poverty and public opinion

• Social Metrics Commission and the Government follow-up to develop a new measure of poverty
• Full Fact
• Resolution Foundation Living Standards Audit 2019
• British Social Attitudes survey Spotlight on Poverty and Inequality (The National Centre for Social Research 2019)
• The Equality Trust (founded by the authors of The Spirit Level)
• Joseph Rowntree Foundation

In order to stand any chance of this remaining an article, rather than a book, I have stuck with income inequality. I will be covering some other forms of inequality over the next few weeks but if your curiosity has been piqued, it is also worth keeping an eye on The IFS Deaton Review of Inequalities in the Twenty-First Century.

High pay

• CIPD and High Pay Centre 2018 FTSE CEO Pay Review
• Economic Policy Institute
• IFS
• ICAEW
• ComRes poll for The Independent

Wealth and worth

• The Spirit Level
• A sample of the posts that debunk The Spirit Level

What to do about it

• Harris Hill offer some useful advice on explaining the salaries of charity CEOs – that will be useful to everyone
• One route out of the corporate high pay coverage cycle is to explore different corporate structures, including employee ownership. Here a few new examples for those of you bored of John Lewis: Seetec, Riverford, Richer Sounds
• The CIPD offers similar advice to mine but in words more familiar to HR and remuneration professionals: how are you measuring performance? Do you have enough data to demonstrate achievement and how are you communicating that? But tellingly they also have policy suggestions for the government which include extending reporting regimes and increasing the remit of remuneration committees – a reminder that this is not an area where inaction is a sensible option.

I would love to find more resources about this topic. Have you seen anything I should read? Do you know somebody I should be speaking to?

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This post first appeared on the Meyland Strategy blog on 15 January 2020 at https://www.meyland.co.uk/post/why-everybody-hates-you-income-inequality