Gender Pay: Preparing for the change in equal pay regulations
While the exact timing and requirements are still to be decided, they will apply to all companies with more than 250 UK employees – leaving only one or two pay rounds for companies to prepare for the change.
This is in addition to the recent change compelling companies who lose equal pay claims to carry out – and publish for three years – the results of an equal pay audit defined by the tribunal.
Reporting of significant equal pay cases going to tribunal has been largely in the public sector to date – the near £1 billion Birmingham City Council case was one of the most sizeable – but the continuing claims against Asda remain one of the most significant private sector cases, with hearings expected this year.
These cases, in addition to the new regulations, highlight the potential risks (both financial and reputational) to an organisation if equal pay is not managed carefully.
In our experience, organisations are well intentioned regarding equal pay, but historically it has been the minority of organisations that actually perform a review.
We understand an equal pay audit or review may cause some nervousness amongst both reward managers and business leaders.
There is a perception they may be challenging and risk increasing reward costs as an outcome, which can make it difficult to make the business case.
Additionally, there is the potential for having to deal with legacy issues that have been ignored by others.
It is not then surprising that equal pay, and the process of managing and reviewing it, has tended to become tomorrow’s task.
With the introduction of equal pay disclosure regulations, deferring it is simply no longer an option.
We have had the benefit of undertaking a large number of equal pay reviews since developing an approach approved by, and exceeding the standards of, the Equality and Human Rights Commission in 2002.
As the UK moves towards a new environment of equal pay regulation, we wanted to remind you of the five most common myths that we see in organisations:
1. “Equality is all about making everyone the same”
In a very performance-orientated organisation the suggestion of an equality review gets this type of reaction.
But equality is not about paying everyone the same but having reasonable and fair reasons for treating people differently where you choose to do so.
The law allows differences due to performance or market demands.
We do not see much of a distinction between paying for performance and being equality proofed.
A performance-orientated organisation should be interested in ensuring that rare financial rewards do not leak away on things that are not aligned to business performance.
What an equality lens in a performance culture context brings is rigour – well-documented robust evidence, high-quality analysis of market data and thoughtful goal setting related to the right measures. In our view this is just good reward management.
2. “It’s a pay problem”
It is sometimes a pay problem but it is always a talent problem.
A big driver of issues in any organisation is the low representation of women in more senior levels, and this can impact the sorts of equal pay statistics the government may require organisations to declare.
Given that for some time now half of highly skilled professional staff leaving university are likely to be female, real advantage in the competition for talent can be gained by thinking through the issues more broadly.
For example, demonstrating a willingness to support women proactively (and their families) after maternity leave and creating female mentoring networks are some of the positive routes organisations have gone down to retain and engage their top female talent.
3. “If you take it in the round, it works out broadly the same”
The current regulations of the Equalities Act (2010) require organisations to look at each piece of remuneration separately, and each should be equal between groups with protected characteristics, rather than different mixes adding up to the same whole.
It is also worth remembering that it is not just the big items of pay and bonus that need to be given attention: benefits, perquisites, access to overtime and training, and allowances for skill or retention, for example, should also be considered.
4. “We have a points-based job evaluation scheme so we are OK”
This is a common perspective we hear and of course we see the confusion between grading, evaluation and pay all the time in our work.
From an equal pay perspective, the only benefit of having a rigorous job evaluation scheme is that you are able to deliver broadly equal rewards to jobholders performing work of equal value, that is, not the same job but one of the same or similar ‘size’.
If a case was brought to a tribunal you would be able to show through the scheme that you had complied.
Of course, having the scheme does not deliver pay equality per se as it merely provides the framework in which reward structures sit.
Not having a job evaluation scheme does not protect against equal value risks.
If a case was brought the tribunal could bring in an independent expert to assess it, and challenging this would be difficult.
Also, with compulsory equal pay reporting from next year, companies without a job evaluation scheme may wish to consider establishing this in advance of the new regulations.
5. “We can’t afford to do anything about it”
Understanding the problem gives you an opportunity to reform schemes and address the worst over time, appreciably reducing risk.
The additional financial impact over time may not be as difficult as you think.
In many cases where inequality is the result of long-serving male pay, taking steps to address the issue is incredibly positive in other ways as it puts the brakes on the pay accumulation of those paid in excess of the market.
Sometimes, an equal pay problem is a failure to address past issues or highlight past reward management failings.
As Asda has seen, do not just think that financial penalties would be the result if the worst happens – reputation is a hard won prize, and the employer brand could be impacted both for current and potential future talent.
This issue of brand will become even more significant as the new regulation will put companies’ pay gap into the public domain.
So, how can I prepare for the new regulations?
While it is difficult to predict how the final disclosure requirements will look, there are a number of things you can do to be prepared.
If your organisation already has good reward management practices in place, with robust governance of performance management, job evaluation, criteria for promotion, job moves and pay, then you will likely be in a strong position when the equal pay disclosure regulations are introduced.
This will also go hand-in-hand with a strong emphasis on manager training in dealing with such matters that may be no more than managing concerns about diversity and disabilities. Unconscious bias can often be at the heart of many management decisions.
While you may not wish to undertake a full review in a formal way at this stage, you could perform an initial health check to see if there are potential risks.
From our experience we would suggest undertaking the following five small tests as these are where we most frequently identify risks for our clients:
1. Starting pay: how similar is the starting pay for men and womenperforming broadly common jobs?
Interestingly, research by the Freakonomics team of Dubner and Levitt showed that this difference was due to willingness to negotiate, which disappeared when recruitment advertisements were placed where the word ‘negotiable’ was shown next to the advertised salary.
2. Women returning after maternity leave: testing here would require data over time to look at three separate groups – women returning to work after pregnancy, regular women, and regular men. Usually we would measure this by comparing performance scores, pay outcomes and promotion experiences.
3. Performance rating curve: do men and women (or those with other protected characteristics) get markedly different performance scores where all other factors are equal?
4. Performance rating aligned to pay outcomes: this test would evaluate if men and women who are at the same level of performance (and you could adjust for position in range if you have a pay matrix) get the same pay increase in practice; likewise, this test could be performed on bonus outcomes.
5. Pay increases on promotion: you can test for bias in this process by looking at the positions in the new promoted range to which the men/women have been promoted to. As pay progression can tend to be somewhat slow in these low inflation times, gaps at the start of one’s career in a new grade tend not to be close over time.
The underlying theme to all these tests is the degree of discretion in reward processes, higher discretion creates a higher potential for risk – particularly in decentralised and delegated reward environments, where indirect bias can creep into even well-intentioned scenarios.
Strong reward processes remain vital to managing potentially inappropriate outcomes.
Communication, clarity of process, good control and governance not only ensure pay and performance continue to be aligned, but also go a long way in mitigating potential inequality issues.
As equal pay becomes a matter of regulation and disclosure, organisations should consider their HR practices to ensure they are in a good position when the regulations are introduced.
This article was supplied by Towers Watson.
In partnership with WTW
WTW is a leading global advisory, broking and solutions company.
