Companies need to prepare for radical pay transparency

Mandatory reporting on the gender gap could soon be followed by ethnicity, disability and more. By David Burrows.

In April 2018, large companies published their first gender pay gap reports. Every one of the 10,528 public and private sector employers required to submit information, did so. What’s more, recent analysis of the data by the Institute for Public Policy Research (IPPR) found that the regulations were having the desired effect. “The first round of annual reporting has both raised the profile of the gender pay gap, and pushed employers to take action,” suggested Lesley Rankin, a researcher at the think-tank.

As Footprint noted in an analysis of the major players in the catering sector, the new rules have led to a period of introspection and a determination to correct institutional bias – conscious or otherwise – that has previously disadvantaged women. Among the 10 companies assessed, the gender pay gap ranged from 5.1% at OCS to 34.1% at Aramark. With the next deadline just around the corner (April 4th 2019), all eyes will be on whether things have improved in the past 12 months. And next year, as part of new pay ratio regulations that came into force in January, there will also be data on the gap between the CEO and median worker.

However, this is just the start. With the ball now rolling on pay disparity, the government has turned its attention to another issue: ethnicity. “Every employee deserves the opportunity to progress and fulfil their potential in their chosen field, regardless of which background they are from, but too often ethnic minority employees feel they’re hitting a brick wall when it comes to career progression,” said Theresa May in October 2018, as she announced a consultation on mandatory ethnicity pay reporting, a Conservative party manifesto commitment in 2017.

Catering and hospitality companies will be particularly interested in the proposals. For one, ethnic minorities are over-represented in the sector, and for another, firms bidding for public procurement contracts could have to demonstrate a “real commitment” to diversity and inclusion. The consultation responses are currently being assessed, so could the idea work?

The short answer is: yes. “I believe it is essential that as well as collecting this data [on gender pay], all large employers [listed firms and those with more than 50 employees] must publish their workforce ethnicity data annually,” noted Baroness McGregor-Smith in her “Race in the Workplace” report to the government, published in 2017. This is already a legal requirement in the US and so it is “perfectly possible” here, she added.

Having said that, it won’t be as straightforward as reporting on gender. For starters, there is no legal obligation for individuals to disclose which ethnic group they identify themselves with. What’s more, the data currently collected by employers is patchy. Of the 74 FTSE companies that responded to McGregor-Smith’s review, only about half were able to provide any data and there were “wide variations in the type of data that companies collected and the number of people who had completed the ethnicity category”. The Equality and Human Rights Commission (EHRC) has said that 32% of employers consider collecting the data “too intrusive”, while 27% report that employees do not want to share the information, and 20% state that collecting it is too onerous. It’s worth noting that the government has suggested that companies with fewer than 250 staff will be exempt from the new laws, mirroring the threshold for the reports on gender pay.

Another headache is the number of ethnic groups: the ONS currently distinguishes 18 ethnic groups within five broad categories. “The numbers of any single group in many organisations will be far too small to draw any valid conclusions,” suggested Len Shackleton, from the right-wing think-tank the Institute of Economic Affairs. He claimed the idea amounts to a “blunderbuss naming and shaming approach” rather than “careful analysis”, and pointed to some of the negative press that companies which have already published such data have attracted.

Similar arguments have been levied at gender pay gap reports – and not just by the likes of Shackleton. The CBI suggested originally that it amounted to box ticking rather than cultural change but has changed its tune: 93% of its members are actively tackling their gender pay gap, which represents a jump of 31 percentage points from a year ago. The organisation is broadly supportive of plans to report on ethnicity pay gaps, according to the Financial Times. “Reporting must be done in a way that is supported by both businesses and employees, to recognise the wide range of ethnic groups and legitimate staff concerns about intrusiveness where sample sizes are small,” it said.

The FT raised another important point: whether the basic statistics will imply naked discrimination where it does not exist. This is why the government has in its consultation asked whether pay information should be published by pay quartiles or by £20,000 pay bands, an approach recommended by Baroness McGregor-Smith in her report. “We found that transparency in organisations is crucial,” she wrote. “No company’s commitment to diversity and inclusion can be taken seriously until it collects, scrutinises and is transparent with its workforce data. This means being honest with themselves about where they are and where they need to get to as well as being honest with the people they employ.”

The EHRC found that 77% of employers said ensuring workforce diversity is a priority, but fewer than half collect data on whether employees are disabled or not (44%) or on ethnicity. What’s more, only 3% actually analyse the data to explore differences in pay. “We need the same level of scrutiny and focused action on opportunities for disabled and ethnic minority staff in the workplace [as we have for gender],” said the EHRC deputy chair, Caroline Waters.

Narrative is as important as numbers, though. One of the drawbacks of pay gap reporting is that there is a tendency to look only at the top-line figures. “There’s no hiding from the stats,” noted Iain McMath, a former chief executive officer of Sodexo Engage – the benefits and rewards side of the business – in an article for People Management last year. “The reports lay bare any percentage difference between men and women’s hourly pay and bonuses. Ironically though, the reports might actually be bad news for those businesses trying to do the right thing. The numbers don’t tell the whole story – merely stating the difference between pay rates ignores the benefits someone opts for, or the difference in pro rata hours worked by part-time staff.”

Companies can include an explanation for their results in the report, but they will need to communicate this well. Sodexo’s on-site services business was one of the early adopters to pay gap reporting – it published its gender pay gap in October 2017 and has conducted research showing that its gender-balanced teams outperform those that are not across a number of key performance indicators. Now the plan is to widen the net to ethnicity. The firm has been conducting a “major audit” of the salaries of its entire UK workforce of 38,500 people (which includes casual employees), looking at ethnicity, age and disability too. A spokeswoman told Footprint that a mandate will be signed any day now that will see the business “take proactive steps to be in a position to report when the government makes [ethnicity pay gap] reporting mandatory if they have not already done so voluntarily before then”.

There is little doubt that ethnicity pay gap reporting is on its way – possibly as soon as April 2020. Some firms will also be preparing for the additional set of pay reports due to be submitted next year: listed companies with more than 250 employees will have to make their first statutory disclosures under new pay ratio regulations, which came into force in January. The only figure everyone will be looking for is the one showing CEO to median worker. Data compiled by the High Pay Centre in 2018, for example, showed the ratio at Compass was 377:1, while at Whitbread it was 142:1. They can expect some awkward questions.

And pressure is already growing for even greater transparency. The IPPR is lobbying for a “fair pay report” that would encompass all of the following: gender, ethnicity and disability pay gaps; the pay ratio between the CEO and median employee; the proportion of the workforce earning below the living wage; and a “fair pay narrative”, setting out the company’s understanding of the various gaps and plans to close them. The genie is out of the bottle in the brave new world of pay transparency and companies need to be prepared.

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