Monday 19 December 2016 4:15 am

Why rising longevity threatens to kill off the traditional City of London pay pyramid

Many professional service and financial firms operate a pay pyramid – those at the top earn large multiples of those lower down the organisation.

Average partner salaries in the Big Four accounting firms, for instance, are around £750,000 but around £40,000 for those starting out. Similar structures are found in law and finance. While undoubtedly an individual’s earning potential at the firm rises with experience, these pay structures seem typical of a “tournament” structure.

Tournament structures create intense competition and an “up or out” culture. Large pay disparities between the top and the bottom therefore fuel higher productivity, greater profits and longer retention as younger employees jostle for promotion or face the consequences and leave. They are prepared to commit to little flexibility and long and demanding hours in the hope that they will advance to the next stage with its associated financial bonanza.

These traditional pyramid pay structures will, however, be severely challenged in the years to come, threatening the stability of this delicate intergenerational arrangement.

Individuals are living for longer and are healthier for longer. Senior partners in these organisations will be pushing to continue working for longer than past generations for financial reasons and because they enjoy the work.

However, these pay pyramid structures require fewer people at the top and for those at the top to move aside at regular intervals.

Too many people at the top, and the salary structure cannot be supported: too little movement at the top, and employees are frustrated at being blocked with no clear reward for their hard work. If firms allow senior partners to stay in place for longer, this will create implications throughout the organisation.

As the proportion of senior partners swell, inevitably the amount paid to each will decrease. As a consequence, those lower down the organisation see the reward for their hard work and commitment diminishing.

What are their options? They can argue that they should be paid now for their current value, undermining the size of bonuses at the top and so diluting long-run retention incentives. They could instead just leave and start up their own company, frustrated with the blockages ahead of them. Alternatively they could scale back on the hours they are prepared to work to bring back into line their effort with their reward.

Whatever their choice, longevity will lead to the fundamental transformation of the pay pyramid. Just as in broader society, ageing in firms with a pyramid structure threatens to undermine long held intergenerational bargains.