As an employer I desperately want to treat my staff fairly. While I operate in an industry that can’t match the city based corporate salaries I still need to offer an attractive remuneration alongside the ‘softer’ benefits of working with a small company.
One big bugbear of mine has been the sheer inequality of pay inflation I have watched over the 30 years since I entered the workforce. I am firmly convinced that this is due to the convention of awarding percentage salary increases rather than fixed monetary amounts.
Basic maths says that 3% of a £20k salary is far less in real terms than 3% of a £60k salary. You may think that the difference is not that significant (£600 vs £1,800) and is more than justified due to the lifestyle inflation that generally accompanies promotions.
However, the real problem comes from the compounding effect. It’s the same as when banks demonstrate the effects of re-investing so that both the original capital and the earned interest attract future interest.
If we take my original example and project a steady 3% wage inflation over the next 20 years, assuming no promotions or change of role during that time, the results are staggering. This is because the increase awarded in one year increases the base pay upon which future annual increases are based.
The person who started on £20,000 would be earning a salary of £35,070 in year 20 while the person who started on £60,000 would be on a salary of £105,210. The initial £40,000 gap between the two would have widened to £70,140.
There would also be a massive disparity between the lifetime earnings of the two individuals over the 20-year period. The first person would have earnt £537,407 while the second would have earnt £1,612,222. Remember, this example is only over 20 years. The average person will work for over 40 years of their life.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 10 | Year 15 | Year 20 | Lifetime Earnings | |
| Salary 1 | 20,000 | 20,600 | 21,218 | 21,855 | 22,510 | 26,095 | 30,252 | 35,070 | 537,407 |
| Annual Raise | 600 | 618 | 637 | 656 | 760 | 881 | 1,021 | ||
| Salary 2 | 60,000 | 61,800 | 63,654 | 65,564 | 67,531 | 78,286 | 90,755 | 105,210 | 1,612,222 |
| Annual Raise | 1,800 | 1,854 | 1,910 | 1,967 | 2,280 | 2,643 | 3,064 |
I believe we have reached this situation due to the widespread media usage of the inflation data provided by the Office for National Statistics. As the name implies, their findings are expressed as ‘statistics’ which are a scientific method of analysing and expressing relationships between large volumes of numerical data. At the heart of the inflation statistics is a typical ‘basket’ of goods and services purchased by a typical household.
While percentage changes make good headlines, applying them directly to wages is not helpful in the quest for pay equity. Giving our lowest paid earners the same percentage pay rise as our highest will not help them to afford to buy from the same ‘basket’ of goods.