Workforce Development

Reducing Inequality: Six Next Moves for Business

March 27, 2015  • Maureen Conway & Judy Samuelson

Inside of a few short weeks, business has shifted the national dialogue about what constitutes a fair wage. Aetna’s CEO Mark Bertolini made headlines in January when he announced the company’s decision to establish an internal minimum wage of $16/hour. A few weeks later, General Motors surprised factory workers by restoring the union profit-sharing plan eliminated when the company took the government bailout in 2009. And now Wal-Mart has joined the parade, establishing a wage floor of $9/hour and a plan to go to $10 a year from now, along with important new work rules. While no one gets rich at $10/hour — and even Wal-Mart is required to pay $15 in Seattle — it’s a nice step up from the federal minimum of $7.25. And let’s face it: with more than 1.3 million employees in the U.S., Wal-Mart has the power to set national labor standards on its own.

Each of the executives leading these moves emphasized the benefits that accrue to the company — employee retention, better morale and higher skills were the big factors. But Bertolini went further in his stated objectives — stepping beyond the self-interest of Aetna: “Since I became CEO, one of my goals has been to help re-establish the credibility of corporate America.”

Bertolini added, “With these investments we are leaning into the recovering economy and working to bring everyone along instead of just a few.”

Kudos to both Aetna and Mr. Bertolini for speaking out on an issue that concerns many. It takes courage to raise a social issue like wage inequality in the face of investors focused only on boosting the stock price. Now, what’s the company’s next move? More broadly, does business have a bigger role to play? The answer to that question is a resounding yes.

“Inequality” brings government regulation and public policy fixes to mind but let’s face it — decisions about wages, benefits, work schedules and skills reside largely in the business sector, which holds the key to expansion of the middle class. At the upper end of the scale are issues of runaway executive compensation, a significant contributor to the growth in wage inequality.

What else then should be in the playbook of chief executives who have read the same tea leaves about the cost to the commons of growing wage inequality? What are some solutions that lie within the business itself?

Here are ideas that could keep up the momentum at Aetna and get the ball rolling elsewhere:

  1. Consider the needs of your employees in designing work schedules. A less noticed, but perhaps more valuable change for Wal-Mart’s hourly workers is the promise of more consistent and predictable work schedules. Wal-Mart and its peers utilize software designed to efficiently match hourly schedules with peak customer traffic. The system creates havoc for workers — who may be asked to show up for an hour, leave for two more and then come back for another three — and it greatly undermines the goal of a committed and productive workforce. The real costs of such a system are borne by working people balancing childcare, education and work schedules of other family members. Wal-Mart’s promise of better work schedules is a big step in the right direction — and may deliver bottom line benefits as well.
  2. Get interested in the pay of your company’s hidden workers. The use of contract workers for jobs that used to be on the payroll — from cleaning offices to running data centers — is the next place to look for substandard wages and working conditions. Apple is rethinking the status of security guards, as one example. What choices are revealed by taking a closer look at the standards for pay and benefits of those who work in your name?
  3. Take a fresh look at who earns the stock options and equity incentives. Using stock-based pay to reward top managers is now standard operating procedure in Corporate America. Stock or some equivalent makes up 60% of the pay packages of top executives. What about the rest of your employees? How can we design the business for shared prosperity? Profit-sharing structures aimed at broader employee stock ownership help spread the wealth around — and programs like these build more resilient, high-performing organizations with a loyal and productive workforce.
  4. And while you are at it — how much equity is too much? Runaway executive compensation is an outsized contributor to inequality. But it’s especially critical to reexamine the mantra about “Pay for Performance,” which focuses top executives on boosting the short-term stock price while creating perverse incentives to externalize costs to host communities, employees and the environment. Further, as Thomas Piketty points out in Capital in the Twenty-First Century, the growth in stock compensation compounds inequality — growing the gap between laborers and those whose compensation is derived from passive investments like market securities. An inconvenient truth is the degree to which the shift to stock-based compensation is driving the wedge between the haves and the have-nots.
  5. Apply common-sense pay brackets that honor the contributions of all—and eliminate CEO “peer” benchmarks.  Corporations too often fail to consider internal dynamics when setting executive compensation. Instead, they rely heavily on comparisons to corporate “peer groups” to guide compensation decisions, which pretty much assures the status quo and steady growth in pay at the top end. Research on principles of good organizational design offer a concrete, common-sense approach to pay equity in organizations committed to rewarding managers for what they contribute. “Felt fairness” research supports an internal pay equity multiplier of ~2.5x between manager and that manager’s direct reports. These calculations can be extended up the corporate hierarchy, from front line supervisor to CEO. Firms like Intel have already done so.
  6. Stop playing along with race-to-the-bottom payoffs for relocating jobs. Corporations, Aetna included, expect tax breaks from local governments for adding or retaining jobs in their jurisdictions. Getting the best possible relocation package may seem like a sound business practice, but it undermines the revenue base for services that businesses value most: education and skills training for essential workers, public transportation and infrastructure. The advocacy group Good Jobs First estimates that Aetna has received tax breaks of over $16 million from the jurisdictions in which it operates. While this may be small potatoes compared to the $1.25 billion Tesla received to locate in Nevada, or the estimated $8.7 billion delivered to Boeing for keeping manufacturing in the state of Washington, in each case the cost for essential local services shifts to regressive taxes on sales or income — paid by company workers. Alternatively, the quality of local services deteriorates.

Inequality is a problem for everyone — for business, for the health of the democracy and for society at large. Our free enterprise system is the driver of income and wealth. Business leaders don’t have to wait for government solutions to the inequality problem. They have the tools at hand — they just need the courage to step away from the pack and use them.