Reducing Income Inequality

This article was written by Jeremy Nicholls, Founder of Social Value International and Co-chair of the Social Value International Board.

Valuation, especially of social and environmental outcomes is always guaranteed to elicit strong opinions from the “you can’t put a monetary value on everything” to the “you cannot make good decisions unless you know how important things are to people”. But either way, interest is growing. Harvard Business School has been running the Impact Weighted Accounts Initiative as a research project to explore how a business’s profits could be weighted to account for positive and negative consequences of running the business. The Value Balancing Alliance has recently released a consultation version of their VBA Methodology Impact Statement on impact valuation. The Capitals Coalition support the Natural and Social and Human Capital Protocols which include valuation and of course Value what Matters is one of SVI’s core principles.

What about an individual approach? Imagine we had a well being account alongside our bank account. Our bank account balance certainly contributes to our well-being and we certainly spend a lot of time thinking about it, especially in the run up to pay day. As Charles Dickens pointed out in David Copperfield ‘Annual income 20 pounds, annual expenditure 19 [pounds] 19 [shillings] and six [pence], result happiness. Annual income 20 pounds, annual expenditure 20 pounds ought and six, result misery.’

But there comes a point where you may have some savings, a rainy-day fund, a pension pot, when you can splash out without worrying too much. The point at which you do not have to worry, when you can spend a bit more than you earn without resulting in misery, is the point that your well-being goes up. And yet how many of us continue to make decisions where earning more money than we do now is still the primary driver of that decision? Even if we are now fortunate to have enough. 

I suspect most of us work in businesses where the difference in pay scales gets higher as you progress further up the scale? I suspect this is also true in a business that has, what might be called, ‘responsible employment practices’ and the business pays the living wage and has a generous holiday package. The increasing difference between grades is so accepted you can even download tools to set up your own pay scales. It is what we all expect, as you become more senior you get paid more. The graph below shows this common relationship between pay and numbers of people in each pay grade. 

From the moment we go to school we are inculcated with a desire to increase our pay. More money will make us happier. And of course, for most of us this is true. According to the ONS, the median salary in the UK is £29,900, as shown in the graph below, and, according to the JRF report on UK Poverty 20/21, 14.5 million people were in living poverty, over 20%. For many of us, more money would make our lives a lot easier. Getting to an income where you do not have to check how much is in the bank, where you can afford to ‘splash out’ from time to time is really important.

Bar chart showing distribution of UK household disposable income, financial year ending 2020

ONS – Household Finances Survey – Year ending March 2020.

But the desire for money is inexorable. Research by Harvard showed that even the extraordinarily rich, the multimillionaires, thought they needed considerably more income to be genuinely happy. But at the same time, research across all income groups consistently shows the marginal utility of additional income falls. Yes, there is an increase in your well-being as income increases but it starts to tail off above a certain level. There is a lot of academic debate here on the relationship between life satisfaction, subjective well-being, and income and on whether income stops having any effect on well-being at all, but there is consensus that there is a tailing off at some point. Perhaps around the point you have enough in the bank not to worry all the time?  

This relentless drive for more income is also very damaging, at least for the many people who do not see their salaries increase with a promotion. High levels of inequality have negative effects on peoples’ well-being, and this has knock on effects on other outcomes, health, and life expectancy. 

It is not only income that increases as you are promoted to a more senior position. You have more control over your time, therefore more ability and freedom to be creative, you can spend more time talking to other people. A whole range of other outcomes all contribute to your well-being. And, in part, therefore the well-being from extra income would start to go down; you have enough to address Maslow’s initial priorities, safety, environment, food and income and you can start to address other dimensions of well-being, agency, relationships and self-esteem. And yet you gain many of these from the work you do in roles that pay more. If we valued someone’s wellbeing in total, adding inequality from income to inequality in these other drivers of well-being, the curve would be even steeper. Inequality in well-being is much, much worse than inequality in income. 

All this is why we have SDG10 Inequality as well as SDG 1 poverty, a global recognition that we need to address poverty AND inequality. But if we are serious about reducing inequality, we need to change our individual relentless pursuit of more income at the point we get more value from other drivers of well-being than from that extra £5,000. We need to switch off the drive for cash. 

Let’s imagine if we flipped the pay scale. A responsible company, or one serious about wellbeing, would recognise the need to get employees to the point they do not have to worry about money as soon as possible and then reduce pay differentials above that point to recognise that senior staff have jobs that provide many other benefits. The graph below shows the flipped pay scale. This is what a responsible pay policy would look like, the ratio between highest and lowest has gone down and, above a certain point, each promotion gets you a smaller increase. 

If there are any companies that already do this, it would be great to know.  

You can hear the cry – we wouldn’t be able to recruit the talent we need, they would all be working for our competitors. Perhaps, rather depends on the package. But it also follows that you would get your pick at more junior roles and perhaps all those better paid junior staff would drive increases in productivity and creativity. Employee-owned businesses generally have more equitable salary structures and research has shown staff in these companies have higher productivity, more involvement in work and a greater propensity to support other staff.

Valuation, in monetary terms, would be helpful so we can put the income alongside other sources of well-being but in the same terms. There is a growing body of work on wellbeing valuation and how the contributing factors vary across income groups. Not perfect perhaps, but we already know that money isn’t a perfect measure either and yet we use it, in fact we are driven by it even when it doesn’t make sense. It would show us that inequality is a lot worse than we thought, that for the better off, we are much better off than suggested by comparison of income and yet our personal decisions are not contributing to our own well-being. 

Meanwhile it would be good to see some companies introducing pay scales that take account of well-being and do not increase inequality. Positively contributing to SDG10. 

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