How does income inequality affect workers today?

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WASHINGTON, April 30, 2014 — Income inequality has become the national topic of 2014. The problem of income inequality became apparent during the Great Recession because the socio-economic status of the middle class and poor became decidedly worse, but wealthy Americans — the infamous 1 percent — become more wealthy.

They whys of income inequality are complex, but its impact on workers and the workplace is clear, and not good.

Our combined unemployment and underemployment rates together exceed 13 percent, a very high level. As a result, our Gross Domestic Product (GDP) is lagging, up 0.1 percent in the first quarter of 2014. But those who are gainfully employed are pushed to produce — and they do.

Workers who at the lower levels of organizations are hurting, and upper management isn’t sharing their pain. When things go bad, firms are more likely to start firing custodians and outsourcing work than to cut the pay of executives. Over the last ten years, workers have been furloughed, have watched entire divisions of their firms obliterated, and have seen their pay frozen or cut.

Meanwhile, senior management’s attempts to motivate them have come down to, “at least you still have a job.” These industry executives are making much more than average workers. The average American CEO makes 230 to 380 times more than an average American worker, depending on how you calculate it.

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This fosters resentment. According to Gallup, 70 percent of American workers are now negative about their jobs. The poll finds that they either hate or are completely disengaged from their jobs. Worker anger, dissatisfaction and boredom cost the economy an estimated $450-550 billion per year in lost productivity, theft, and missed work days.

“Why should I work so hard for [literally] so little?” “My family and friends are far more important to me than this job, so why should I devote so much time to it?” “The bosses make so much more me than me, why do I bother working so hard for them when they do not share the wealth?”

Questions like these are more pervasive than ever given the new wealth at the top. Workers cannot see the benefit to them when they give all their effort and dedication to a company that does not fairly pay its employees. It is quite different when everyone is making pay that appears equitable, as this makes everyone feel like they are on an equal playing field and incentivizes them to contribute.

As a result of these new attitudes and beliefs, the quality of organizations is decreasing rapidly. Employees tend to avoid promotions or promotional opportunities due to the added responsibility without the added fair compensation. There are other signs of decreasing quality including declining customer service (e.g., the airline industry), and product quality (e.g., frequent product recalls). Even small responses like staying late to get the job done are decreasing. What, after all, is the point?

When competent employees avoid promotion, we begin to develop an enormous leadership problem. We see this today in public safety organizations. An officer makes a decent salary because she makes her base pay plus overtime. That officer’s supervisor gets a remarkably similar paycheck. But, when a person is promoted one or two more ranks into middle management, his or her pay starts to diminish because management cannot earn overtime.

Such employees work longer hours at higher ranks as they have an extensive amount of responsibility and they are held accountable for serious public safety issues. Yet, their pay effectively diminishes until they reach Deputy Chief or Chief. Then, their salary is double or triple that of an officer and low level supervisor. This example can be generalized to include most public organizations in general.

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In private industry, the exact same phenomenon exists. Lower level workers are incentivized to join an organization with competitive pay. As they climb through the promotional ranks, they are expected to put in very long hours, often including travel, and have extensive responsibilities. Yet they are not being paid proportionately. When they look at their Chief Executive Officers, they can only say “wow” when they notice their considerably higher salaries, benefits and noticeably extravagant lifestyles.

Excellent middle management is diminishing and it is going to disappear if top leaders fail to share the wealth. In some cases, entire compensation systems need to be rebuilt. Revamping compensation systems is complex so organizations tend to avoid it.

Unions are an answer, but unions have not done their jobs effectively, and they have fallen from favor. They need to return to action in a reasonable and hepful way.

There are those of you who are dedicated to your company and are willing to work hard for the good of it are in the minority.

Senior managers and owners must share the wealth. They should be de-incentivized to keep the money. If they continue to hoard it, the working class will one day refuse to work for them and be unable to afford their products. This is a lose-lose strategy.

I heard on the radio the other day from a lovely English gentlemen – great income inequality leads to revolution or a new tax system. He believes that we are civilized enough to revise our tax system and incentivize our corporate leaders to share their wealth.

I think a tax plan is a good idea, but long term thinking is a better one. Exceptional workers need fair and equitable pay. If they perceive it to be inequitable, they will be unmotivated to work hard. This is classic motivation theory.

When workers feel their pay and benefits are equitable, we will see a positive shift in balance toward caring more about our companies and careers again. In other words, workers will become reinvested in the outcome of their companies.

This week’s prescription: Incentivize your workers through pay equity

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