What salary should you pay to make employees happy?

June 25, 2019

Some people say that money can’t buy you happiness. So why do so many other people say that greedy corporations should stop trying to fob off their staff with free fruit on a Wednesday, and pay them more instead?

Creating a happy workforce is a delicate balancing act, that does not have a single answer. So today, I want to look at how salaries impact happiness and mental health – and whether there is an actual price tag that will make employees happy.

The lowest 20% of earners are depressed

I talk a lot on this blog about mental health, and how you can help move your company away from a climate of mental ill-health, and closer towards a culture of strong mental health. Part of this does indeed involve initiatives such as organising wellness initiatives, and bringing on mental health first aiders.

But while there is a lot you can do to support physical and emotional wellbeing through programmes and initiatives in the workplace, you shouldn’t be hiding from the fact that a person’s mental health is also impacted by their financial wellbeing.

According to Mental Health Foundation, adults and children living in the 20% of lowest income households, are two to three times more likely to develop mental health problems, than those in the highest. So what does that translate to, in actual financial terms?

Here’s what the most vulnerable people are being paid by their employer

The Office for National Statistics tells us that the lowest 20% of households, are those with a combined income of £17,849 or less.

But this doesn’t give us much to act on. You see, as an employer, you can’t really be held responsible for a combined household income – unless of course you employ everybody who lives in that household.

So I thought it would be helpful to also look at what the lowest 20% of individuals are earning, too. And according to official government statistics, the lowest 20% of earners, are those who bring home £15,500 a year or less.

So, if I finished the article here, you might conclude that in order to prevent a mental health crisis, and make employees happy at work, you simply need to pay them more than £15,500 a year, right? Not quite. Let’s look at the next level in this equation.

Paying the minimum wage is not enough

Under UK law, you must pay your employees the National Minimum Wage (for under 25’s), or the National Living Wage (for 25’s and over). These are currently set at £7.70 and £8.21 respectively.

But while paying the absolute minimum might keep you away from legal bother, it doesn’t foster the happiest workplace. And actually, even the phrase “National Living Wage” is quite misleading, according to the Living Wage Foundation. In reality, they say you need to pay employees at least £9 an hour, or £10.55 for those in London. These rates are based on the actual cost of living across the UK, and according to the Living Wage Foundation, if you don’t pay these rates, then your employees may struggle to feed themselves and pay their rent.

The rates recommended by the Living Wage Foundation, are known as the “Actual Living Wage”. And while you are not obliged to pay these rates under UK law, there are over 5,000 companies who have voluntarily become accredited Living Wage Employers, including 1/3 of FTSE 100 companies.

So is the key to employee happiness to subscribe to becoming a Living Wage Employer? It’s certainly a step in the right direction, but again, we can take things further.

Finding happiness on a salary of £18,720

If the Actual Living Wage is £9 per hour, and the average full-time employee works for 40 hours a week, then that means that we should be paying employees at least £18,720, if we want to make sure they can afford to live their life. But is this enough?

I ran a quick Twitter poll, to get an idea of where the world is at on this. And only 16% of people said they thought it was possible to find happiness on a salary of £18,720 per year.

According to Living Wage Foundation, we need a salary of at least £18,720 a year to get by (outside London). But while this might be enough to survive, is it enough for a person to be happy with their life?

  • Yes: 16%
  • No: 76%
  • Not sure: 8%

So, if employees can afford to get by, but they still aren’t happy, then what is the answer to employee happiness? Do we simply continue raising income, until there are smiles across the board? Yes and no.

There’s a point where more money stops making you happier

To a certain extent, the amount of money we earn does have a direct impact on our happiness. We need to be earning enough to be comfortable, to begin with. And even beyond this, salary correlates somewhat to happiness.

But this doesn’t mean that the more you pay your employees, the happier they automatically become.

“True happiness tends to be independent of a salary once you reach a level of comfort and security in your daily life where you’re not worried about your next meal or having a place to sleep” says Stacy Caprio, of Fiscal Nerd. “Money does help you buy extra levels of comfort that may make your life easier, but it does not guarantee that you will become automatically happier.”

So where is the point at which money stops increasing our happiness levels? In 2010, Time magazine placed that figure at $75,000 per year, which is around £60,000. Research suggests that the higher towards the £60,000 you climb, the happier you tend to feel about your life. But beyond this, there is no significant correlation between employee earnings and employee happiness.

Our happiness is affected more by how we compare our salary to others

So, the sweet spot for a happy salary is somewhere between £18,720 and £60,000. But actually, many experts say that the main reason employees feel unhappy with their salaries, is because they are comparing their own salary, with the salaries of their peers.

“It’s social comparisons that are to blame for unhappiness, not actual salaries” claims health and wellness expert Caleb Backe. “When your salary is higher than those around you, your happiness might temporarily increase – until you find out that there’s someone doing the same as you, who is richer than you.”

And actually, this line of thinking is grounded in plenty of research, including research by Adams from 1965, and more recently, a 2010 paper from Warwick and Cardiff University.

For more advice on helping your employees feel more fairly paid, you might like to read my interview with business psychologist Simon Kilpatrick, which talks about how Equity Theory impacts employee happiness.

Pay more if you can – but don’t lose sight of reality

In conclusion, start by making sure you’re paying all of your employees a fair wage. Don’t stiff them out of a couple of grand a year, just because you can get away with it legally – if your employees are on the lower end of the pay spectrum, you could be putting them at risk of serious mental health issues.

Assuming you are already paying your employees enough to live comfortably, then consider paying them more. If you can afford to, of course. For most earning brackets, an increase in pay is likely to result in an increase in happiness.

But remember that money alone does not buy happiness. Do not assume that you can just throw more money at your employees, and end up with a happy workforce. If you are paying employees unfairly in comparison with one another, they will be unhappy regardless of what their rate is.

And if your organisation is suffering because you have a culture of fear or intimidation, either at mid-management level, or even from the very top, then there are other things you need to do, beyond increasing salary, in order to make employees happy, loyal and more productive.

 

Get the big lesson of the week, delivered straight to your email inbox - pure HR insight, zero spam.

Please enter a valid email address

We don't sell your details. You can unsubscribe anytime you like.