April 15, 2022

Top Tips to Stop Widening the Wealth Gap

By Vega and Mala

Hello, my friends! How are you? Are you OK? Probably not. Or at least, probably not totally, even if sort of. Just like Mala and me! Just like all of us. If you’re tired, welcome. There’s more than enough room for you in our Collective Community Hall of Worn-Out People. The door is propped open. Feel free to come on in and find a place to lay your mat and dissolve into oblivion for as long as you need.

And kudos to us, for giving ourselves this time. And welcome back to our ongoing challenges.

Speaking of ongoing challenges: here’s an ongoing challenge. An obvious ongoing challenge is racial wealth inequity. (How’s that for a segue.)

Great segue, Vega. mmhm. So, yes, racial wealth inequity.

As an HR consultant, I’m interested in how employers have a bigger role to play in reducing the racial wealth gap than they might realize. For example, a 2019 Federal Reserve Bank of Cleveland study found that closing the income gap is the fastest way to close the racial wealth gap. And income is squarely in an employer’s circle of control and influence!

I have a lot to say about how our movement organizations are inadvertently contributing to the racial wealth gap through our default compensation policies, and how (and why) to change that. I’ll have much more to say about all of that in future posts, but here, I’d like to focus on a few actions you can take immediately to reduce the racial wealth gap.

And without further ado, here are my Four Top Tips:

ONE: Do Cost-of-Living Adjustments (COLAs) differently:

One immediate fix is to stop using percentage-based COLAs. Maintaining COLA proportionately might, on the face of it, seem—if not “equitable,” at least neutral. In fact, it is neither neutral nor equitable. COLA “neutrality” might look like giving the same dollar increase to everyone. COLA “equity” might look at estimating where someone falls along the continuum of inequality (perhaps based on something like the inequality-adjusted human development index (IDHI) or the Social Vulnerability Index (SVI)). Now, that is a lot, and no doubt more than a little daunting. I get that. (Vega popping in here to say: fear not! I’m betting Mala has a spreadsheet up her sleeve to help you make this happen. Watch this space!) For the moment, though, at least using a flat-dollar COLA would result in a more equal distribution, and that’s a step worth taking.

Why do I advocate so strongly for this? Consider the history and purpose of a COLA. A COLA is an adjustment made on various financial figures – from social security payments to tax brackets to wages – to make sure that incomes keep up with inflation (the rising costs of goods and services over time). It’s typically based on the consumer price index and meant to help people keep up with their standard of living.

Given the purpose of COLA, it’s worth noting that everyone in an organization experiences the same inflation, for the most part. Say the cost of a gallon of milk increases by 10%, going from $4.50 to $4.95 (an increase of $.45). I, earning $100K, and a colleague earning $50K are both paying $.45 more per gallon. I am not paying twice as much as my lower-paid colleague. Why, then, should I get twice the COLA?

If you’re not sure what a new COLA policy could look like, here’s an example:

Subject to available funds, we will use [index to be used (e.g., the consumer price index, the social security administration rate)] to determine the cost of living adjustment (COLA) percentage for the years since the organization’s last COLA. 

We will use the following formula to determine COLA:
[Sum of All Eligible Salaries x the Percentage Rate] divided by
[The Eligible Number of Employees] equals
[Amount of Flat $ COLA distribution]

This example was inspired by Mijo Lee, consultant and former executive director of Social Justice Northwest, who asked the question on Facebook in 2016.

I’m guessing that if you’re reading this, you’re paying attention to, concerned about, and/or livid about the racial wealth gap, but in case you aren’t, here’s a quick snapshot (fair warning: if you’re not a spreadsheet geek, this may not be for you!). (Vega here: nor is it “quick”! But it sure is helpful!)

TWO: Do retirement benefits differently.

  • Stop using matching-only retirement contributions. If you have any money to contribute to employee retirement (which I hope you do!), an equitable choice you could make would be to make an employer contribution to all employees. Lower income earners are stretched for disposable funds. They may not be in a position to choose between food, shelter, debt repayment…or retirement contributions. You as an employer simply making a straight-up contribution allows lower-income earners to build retirement savings. NOTE: in the interest of giving employees choice and agency, another option is to make a retirement contribution the default, but offer employees the option of having that money go toward some other benefit (including their paycheck).
  • And using the same logic as we did in the COLA example above, don’t use percentage-based retirement contributions. The “quick” snapshot breaks down the difference between a percentage-based and flat-dollar contribution to retirement. As I understand it, your plan can use, for example, the ‘same dollar amount’ option to satisfy the safe harbor non-discrimination general rule (See 26 CFR § 1.401(a)(4)-2(b)(2) or (b)(3)). (NOTE: I’m not a benefits administrator, and while I have a great interest in equitable benefits, even I am not patient enough to wade through the details of the retirement benefits law. So a big thank you to Kathy Tompkins, EA, MSPA, MAAA, a retirement benefits advisor and administrator, who patiently answered my questions and pointed me to the exact statute linked above.)
  • And finally, use a retirement benefits provider that allows employees to take a loan on their retirement in case of hardship. Taking a loan might be frowned upon, but it’s a safety net not otherwise available to the 60% of Americans who can’t afford three months of emergency expenses.

THREE: Do merit raises differently.

Are you doing percentage-based raises? Wanna guess what I’m going to say about that? Yep, you guessed right!

(Vega here: And that’s all she has to say about that.)

But another thing…I’d like to question how we reward good performance. Specifically, I’d like to question why we add merit pay to salaries.

Hear me out! Merit pay is recognition for past work. As such, it makes sense for it to be rewarded as a one-time bonus: “you did great last year; here’s a dollar reward to recognize that.” Wages (or salary), on the other hand, is remuneration for current and future work: “your commitment to our work, you continuously contributing your labor is deserving of a regular payment; here’s a check to compensate you for your continued contribution.”

Merit recognition, in other words, should fall under a supplemental pay category, and not a salaryincreasing category.

I have plenty more to say about merit raises (teaser: we know that recognizing “merit” is subject to gender and race bias, especially when it’s based on the assessment of just one person. So how do we minimize bias and still reward employees who’ve gone above and beyond?). But for now, my main point is to, for the sake of reducing racial wealth inequity, move away from percentage-based add-to-the-salary merit raises to flat-dollar supplemental merit bonuses.

FOUR: Raise the base of the lowest-paid workers in your organization to at minimum a geographically-based living wage. Ideally, your total compensation package would support your lowest-paid workers to thrive; i.e., earn a thriving wage. By that I mean, a total compensation package that allows for enough: enough disposable income, enough rest and rejuvenation time, enough relationship time, enough mental health time – for everyone. (Vega here: FUNDERS! ARE YOU LISTENING?!) 

And there you have it: my top suggestions to more or less immediately shift compensation practices toward equity.

Your thoughts? If you have any other ideas for how to make an immediate dent in the racial wealth gap, we’d love to hear from you!


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