Income inequality: working together to improve equality

In a previous blog, we highlighted the impact we believe income inequality has on employee health, workforce productivity, and ultimately the overall demand for goods and services. In our view, the influence of COVID-19 will only exacerbate this trend.

As one of the largest asset managers in the world, we expect the companies in which we invest our clients’ assets to be exemplars rather than exacerbators in reducing income inequality. Our clients are also expressing an interest in wider stakeholders being considered when determining corporate strategy.

We firmly believe that as companies are inextricably linked with the societies in which they operate, income inequality can no longer be an issue for governments alone to resolve. We must all work together to help reduce inequality in all its forms. There are many steps that companies can take to alleviate income inequality within their own organisation, and we also ask that companies require their tier-one suppliers do the same.

As a bare minimum, we would call on companies to:

1. Consider paying a real living wage

There are some examples of good corporate practice already in this area. In 2019, Amazon increased its wages for both UK and US employees to £10.50 and $15 respectively. Unilever is living wage accredited (covering the company’s own staff and its overall supply chain).

However, while most developed countries have set a minimum wage, in many cases it falls woefully short of an actual living wage. Professor Amy Glasmeier of the Massachusetts Institute of Technology, through the use of her Living Wage Calculator, concluded that while in the state of New York the minimum wage had been set closer to her proposed living wage, at $15, there were glaring regional differences across states. In the UK, while the introduction of a new National Living Wage saw wages increase, the Living Wage Foundation believes this should be higher at £9.30 an hour and £10.75 an hour for London.

2. Reduce insecure working practices and promote flexible working

The use of insecure working practices such as zero-hour contracts, temporary agency work and bogus self-employment has increased dramatically since the global financial crisis, reflecting in part the rise of technology and automation. Although there may be some legitimate business reasons for utilising these types of practices, we want companies to introduce minimum standards to ensure the workforce is protected. Minimum standards should ensure that all members of the workforce have an employment contract that entitles them to basic human rights, sick pay and paid leave, as well as a guaranteed number of working hours per week to ensure they have sufficient income to meet their basic household needs. We recommend they be offered at least three weeks’ notice of termination.

3. Improve incentives for lower-paid workers

We firmly believe boards should consider establishing and articulating long-term business strategies that focus on their lowest-paid employees, assessing ways to link performance and reward in a similar way to executives. As part of this process, boards should evaluate the take-up of company benefits by lower-paid workers. In those countries where such benefits are offered, we expect that there is little take-up by low-paid employees. Instead, they may prefer a more flexible approach that allows them to choose whether they take the benefit or a cash equivalent. Cash-based profit share programmes and the offer of free shares could also be considered. In the UK, BT and Dixons Carphone have introduced a free share programme for their employees and we would encourage others to follow suit. 

4. Provide education and opportunities for the young

Companies should invest in their future in a more meaningful way and create the right opportunities for young people. This could be done by staging educational roadshows for 14 to 18 year olds, or offering summer work placements and apprenticeships or bursaries to gifted children from poor backgrounds so that they may reach their potential and have the opportunity to join a graduate programme.

In short, we want public companies to be leaders in improving equality for all. During the current pandemic, we understand that falling revenues for some means companies face a balancing act between reducing headcount on the one hand and securing future growth on the other. But we want management to be aligned with the long-term consequences of their actions.

At LGIM, we are working tirelessly to ensure that income inequality is reduced as we encourage companies to pay their employees enough to live a better and healthier life. We believe that companies should be proud of their strategic efforts to reduce income inequality and ask that they share objectives and progress with their stakeholders through annual disclosures.

*All references to specific securities are for illustrative purposes only. The above information does not constitute a recommendation to buy or sell any security.