When Hillary Clinton set out her vision for a stronger US economy at her official campaign launch last month, she presented voters with two contrasting versions of corporate America today.
The first depicted the now-familiar, populist post-Crash image of corporate capitalism – selfish, red in tooth and claw; both predator and parasite: “Corporations making record profits, with CEOs making record pay, while your paychecks have barely budged….the top 25 hedge fund managers making more than all of America’s kindergarten teachers combined and, often paying a lower tax rate…”
The second celebrated businesses that are embracing and advancing progressive values. These businesses, she told supporters, are “allies for change”: “the business leaders who want higher pay for employees, equal pay for women and no discrimination against the LGBT community either.”
One agenda, for Clinton, expressed the contrast most clearly: rising income inequality – what President Obama has called “the defining challenge of our time”.
This defining challenge has a high and growing profile in the US. And it’s easy to understand why: the top 20% of US households own more than 84% of the wealth, and the bottom 40% combine for a meagre 0.3%. The trend is getting worse: the best paid 1% of workers earn 191% more in real terms in 2011 than they did in 1980, while the wages of the middle fifth fell by 5%.
What is true in the U.S. is also evident in the majority of the world’s advanced economies. In May, the OECD reported that income inequality has reached its highest level in more than 30 years in member states, the highest since records began. Last year, the organisation’s research showed income inequality has a “statistically significant impact” on economic growth. In the UK, rising inequality cost the economy nine percent of GDP between 1990 and 2010; the US lost seven points.
Income inequality is symptomatic of deeper structural inequalities in society- education, health, gender, race, demographics - but it’s big business that’s taking the heat. A study by the National Bureau of Economic Research indicates that this may not be entirely prejudicial. ”There is a positive and significant relation between rising wage inequality and employment growth by the largest firms in the economy,” the authors write. The report cites three reasons for this: first, wages associated with “routine” job tasks are relatively lower in larger firms due to a higher degree of automation; second, larger firms pay relatively lower entry-level managerial wages in return for providing better career opportunities; and thirdly, ”part of what may be perceived as a global trend toward more wage inequality may be actually coming from an increase in employment by the largest firms in the economy.”
Real or perceived, the issue of income inequality is beginning to appear on every big business leaders’ radar screen – even those whose exclusive client base once insulated them from such shifts in societal expectations. “It’s really what keeps me awake at night”, Johann Rupert, chairman of Cartier owner Richemont, said during a speech at a Financial Times conference in Monaco this month. “We cannot have 0.1% of 0.1% [of rich individuals] taking all the spoils. And folks, those are our clients. But it’s unfair and it is not sustainable. So I don’t know what new social pact we’ll have, but we’d better find one.”
The need to find a “new social pact” on income inequality is certainly rising up the UK corporate agenda, with calls to lower executive remuneration, raise the minimum wage and end zero hour contracts. In June, the Financial Times reported that the average FTSE 100 CEO is paid 150 times more than the average worker, sparking a wave public anger and scrutiny of individual CEO pay packages. In the same month, Ovo Energy, an independent utility provider, became the 1500th UK company to sign up to the long-running campaign to introduce a national living wage – £9.15 an hour in London and £7.85 an hour outside London (significantly higher than the legally enforced minimum wage of £6.50 an hour). Barclays, Nestle, KPMG, PwC are among those already supporting the living wage.
However, it is in America that civil society is most effectively, and vociferously, mobilising to address unfairness in the system. In April, 60,000 workers in 200 cities walked out on jobs and joined demonstrations calling for a minimum wage of $15 an hour in the US, more than twice the current federal minimum of $7.25. The “Fight for $15” protest is said to have been the largest in US history by low-income workers.
Reversing this gap has become a cause célèbre and campaign focus for public leaders, a political whetstone against which there is no shortage of candidates eager to grind their axe and sharpen their rhetoric, especially at election time. New York City Mayor Bill de Blasio, who came into office six months ago promising to take on the “crisis of income inequality” in the US’s biggest city, is now engaging other big-city mayors in a year-long task force to “leverage the power of municipal governments to advance a national, common equity agenda” at the U.S. Conference of Mayors’ annual meeting last week.
Politicians have popular support behind them. A New York Times/CBS News poll released in June showed 66% of US citizens feel the distribution of money and wealth in the country is unfair and should be more evenly distributed. Half of all people surveyed said they were in favour of limiting the amount of money earned by top executives at large corporates.
The U.S. business community is beginning to shift its position in response to public pressure. The clothing retailer, Gap, was among the first American corporates to act by raising their minimum wage to $10 per hour, a pay increase for 65,000 of their 90,000 employees. In February, Walmart broke ranks with many other employers of low-paid workers by announcing it would pay all of its employees a starting rate of $9 an hour, rising to $10 an hour for existing staff by February 2016. In April, McDonald’s, one of the main targets of the Fight for $15 campaign, said it would raise the average US employee hourly wage from around $9 to $10 – although critics say this will fail to cover 90% of McDonalds employees who work in franchises. In May, Facebook waded into the debate, stating that it would be requiring its subcontractors to pay their employees, including janitors, security guards, and food service staff, at least $15 per hour. And in June, for the second consecutive year, Ikea raised it minimum wages, taking average hourly pay to $15.45. The company also announced that it would benchmark wages against the MIT Living Wage Calculator to adjust for the cost of food, taxes, housing and transportation in enhanced salaries.
Yet, corporate America is also increasingly aware that wage inequality is unequally distributed, with some segments of society more likely to be worse off and left behind. Closing the gender income gap – a perennial topic – is now gaining particular attention from executives as companies recognise current, incremental steps have made scant difference. In the US, women make approximately 78 cents to the dollar of what men earn; this drops to 64 and 56 cents for African American women and Latinas respectively. The latest reportfrom the World Economic Forum revealed it would take 81 years to achieve worldwide gender equality in the workplace, for example, if progress continues at the current rate.
In April, Marc Benioff, the CEO of Salesforce, announced he was reviewing employee salaries at his cloud-based software company to ensure male and female workers are paid fairly and have equal opportunities for advancement. “When I’m done, there will be no gap”, Benioff told the Huffington Post.
To instil a culture of fair pay, Reddit CEO Ellen Pao has banned the negotiating on salaries during the recruitment process citing research indicating that men tend to negotiate harder than women and that women are often penalized when they do negotiate.
However, while these developments undoubtedly represent positive steps forward, real “allies for change” among big business must now take an active role in shaping the agenda on income equality, or risk it being defined around them. The dangers of failing to do so are obvious: in a globally integrated economy, there are clearly limits to how far a business can answer the clarion call of civil society before it comprises the competitiveness necessary to deliver the very jobs it faces calls to enhance; that is, unless businesses together succeed in shifting the value of human capital at an industry or macro economic level and are rewarded by governments through the tax system, a move the UK Chancellor of Exchequer has been urged to consider. But in the near term, even without such constraints, incrementally ratcheting up “dollars per hour” for the average worker will not prove sufficient to close the increasing gulf between bottom and top wage earners.
True allies for change have a role and a right to contribute to what that change might look like. Dialogue determining a fair living wage that is both socially just and financially sustainable in a competitive global economy would be greatly enriched by greater involvement from leading businesses. Ultimately, however, the role of business in addressing income inequality must be broadened beyond a singular focus on minimum wage workers (and top executives).
First, businesses serious about advancing the agenda should start by looking into their own payment structures and the principles that underpin them: are the assumptions that govern them clear, could they be “fairer”? What definition of “fair”reward would make sense for the business and to workers? Does payment analysis highlight big gaps among the workforce at large that require narrowing – for example, between men and women or ethnic minorities; top executives and the average worker; contract workers at the bottom of the pay pyramid?
Second, businesses should not allow their perspective on social inequality to become reductively focused on the issue of salary: income is only one aspect of inequality – and as much a consequence as a cause. Businesses have for many years been engaged in tackling cultural and social determinants of inequality in the economy – through programmes, for example, supporting education, employability and skills. Recently, there have been tremendous examples of corporate activism on equality agendas: Unilever’s work on women throughout its value chain, and the tech sector, led by Apple, on anti gay legislation in the U.S. are just two that come to mind.
Yet this broadening and deepening of big business’s contribution to income equality will require more than “allies for change”; it will necessitate new alliances for change: business, government and wider society working together, not against each other, as part a ”new social pact”.