Pay Progression for Low-Paid workers – Paper 2

This report seeks to understand whether and how policymakers can use the tools at their disposal to shape corporate-decision making. In particular, it focuses on how to encourage businesses to use their decision-making to promote wage progression and career progression among low paid workers.

Our research notes that company behaviour on wage progression and career progression, and workforce training (an enabler of progression), is driven by a wide range of factors, such as:

• Pressure from investors – Investor activism can influence corporate behaviour on a wide range of issues, from environmental matters, to whether a company takes a short-term or long-term view on investment in the workforce.
• Reputational concerns – Companies such as Amazon have increased wages for lower paid workers in response to bad media publicity about poor working conditions.  Over 5,000 businesses in the UK voluntarily pay the real Living Wage, with reputational benefits cited as a key driver of this.
• Pressure from consumers – Consumers are also concerned about workers’ pay, with nine in ten of British consumers agreeing that wages should reflect living costs.  However, the evidence is inconclusive on how this concern manifests in the form of encouraging pay and career progression for workers on low-pay in particular.
• Pressure from prospective workers – PwC research from 2011 found that providing opportunities for career progression was the most commonly cited factor which makes an organisation an attractive employer, among 52% of millennials globally.  The same survey also reported that the most influential factor leading millennials to accept their current position was the opportunity for personal development.
• Legal considerations – Section 172 (S172) of the Companies Act 2006 obliges corporate directors to act in the interest of the company’s employees, among other stakeholders such as shareholders, suppliers, and local communities affected by company activities. However, there is limited evidence that S172 has a significant impact on company behaviour given that it is difficult to enforce.

With the above considerations in mind, the report explores a range of policy options for changing corporate behaviour on pay and progression in the workforce, such as:

• A new requirement in Section 172 (S172) of the Companies Act requiring Directors to ensure workers share in the proceeds of growth in a company. Government could mandate that company Directors have an obligation to ensure and demonstrate that employees, at all levels of the company, are sharing in the proceeds of company growth. Combined with the strengthened S172 reporting requirements discussed above, this could encourage a more even spread of pay and career progression within businesses.

• Tailoring pay expectations to each sector – It may be possible to develop guidance on progression expectations in a sector. Such guidance could outline career progression expectations in different sectors to encourage employers to adopt best practice, and to raise awareness with employees of what paths are possible. For example, it could set out employee profiles and outline the stages of their career.  This would not replace or amend the minimum wage regulation itself, but it would raise awareness that the existing minimum wage is the lowest boundary for certain sectors. The guidance on career pathways would be available for employers to gain an insight into what they could be doing to encourage wage and career progression.
• Transparency requirements on pay progression and training.  Requiring firms to publish data on wages, progression, training budget and HR practices may exert pressure on them to conform to the expectations of consumers, investors, employees and / or wider society. This policy is likely to be most effective at influencing the actions of firms who are concerned about their reputation, as they would want to avoid a negative public image which could affect demand for their products or services from consumers or influence how they are viewed by investors.

1. The Government should require firms to draft a narrative report that explains their decisions on wage-setting and provides a strategy for supporting pay and career progression, including key targets for the future. This could form part of S172 reporting requirements, given our proposal above that employee progression is explicitly expressed as an obligation of directors within the Companies Act.
2. The Government should publish and publicise rankings and league tables by sector, identifying the firms with the largest pay ratios and worst records of pay progression and training using a simple quantifiable metric.

• Encouraging shareholder activism. Third parties should consider how treatment of low paid workers could feature more prominently and extensively in environment, social and government (ESG) criteria, alongside adoption of the Living Wage. (Share Action have developed some thinking in this area, however more third parties should follow).
• Accreditation schemes could be used to highlight employers providing training opportunities equally across their workforce, including to low-paid groups. We would expect government and other stakeholders involved in the construction of a new accreditation standard to engage with the corporate and investor community. Combined with increased investor activism, accreditation/kitemarking of firms doing the “right thing” on career/pay progression could help influence corporate decision-making. We would expect the accreditation to form a key benchmark for ESG investment.