Closing the gender pay gap - Towers Watson’s response to government consultation

The UK government recently closed their consultation on 'Closing the gender pay gap', which will inform new legislation requiring organisations with over 250 employees to disclose the difference between pay for male and female employees.

As experienced practitioners of equal pay audits, our view is that increased disclosure should lead to greater transparency of gender pay differences, which can lead to changes in pay practices that both close the pay gap and make reward systems more effective.

The regulations will need to be robust and well thought through, but more importantly support organisations to enable them to resolve any issues highlighted and understand the reasons behind them. Without careful consideration, the regulations risk becoming a ‘tick box’ exercise that organisations won’t take seriously or value.

In our response to the government we highlighted five key ways to make the regulations robust and effective:

How should pay by gender be compared?

Fundamental to reporting gender pay differences is defining the statistics that should be reported and the most appropriate way to compare pay levels for men and women.

In an ideal world organisations would be able to report both at a high level (for example, ‘one number’ across the organisation) and also at a more detailed level (for example, by job grade and job type).

While an overall gender pay difference figure should be relatively straightforward for any organisation to calculate, a single figure compares pay levels for men and women in different roles (ignoring differences in market pay for example), and working different hours (that is, full time and part time).

As such, it will not show where and why pay differs by gender, nor highlight areas for attention. It would be relatively simple to report, but may prove of little real value and we believe is unlikely to support the goal of reducing gender pay differences.

The risk is that the headline figure may indicate that there is an issue, or indeed no issue, when in fact the reality is entirely the opposite. In our view, any analysis must be considered in the proper context to provide meaningful insights.

Analysis by level or job type would be more useful, comparing jobs on a like-for-like basis and allowing both the organisation and interested parties to see where potential gender pay differences exist. This approach is more complex and relies on organisations to have relatively evolved HR processes and data - therefore smaller or newer organisations may find this challenging.

We believe that consideration should also be given to sample sizes within each level or job type. Organisations could, for example, analyse and publish the size of the male and female workforce overall and, if more detailed analysis is performed, the sample sizes of males and females in each job group in order to add context.

However, for organisations with fewer than 1,000 employees, sample sizes may be too small to offer a meaningful comparison between male and female pay. It is important to remember an employee can form an equal pay claim based on just one comparable employee, therefore companies might wish to make their own internal analysis more detailed to monitor potential equal pay risks.

Our view is that, where sampling size allows, organisations ideally review equal pay on a job level basis and also on a job type basis. This may exceed the requirements of the final regulations, and therefore wouldn’t need to be published. However, this level of granular insight is fundamental in equipping organisations to review – and then take action in response to – the areas of potential equal pay risk identified.

Which organisations should be covered by the regulations?

We believe which organisations should have to disclose under the legislation will depend on the disclosure requirements themselves.

If organisations are only required to report the overall gender pay difference figure, then the proposal for organisations of at least 250 employees would seem to be appropriate. If, however, organisations are required to provide more detailed analysis (by job level or job type for example), this may begin to present problems for robust and meaningful analysis.

In our view, the best solution would be a tiered approach, whereby organisations of a certain size (for example, 250 – 1,000 employees) report one single full-time equivalent gender pay difference figure across the organisation, while larger organisations report by level and job type, as defined by the organisation itself.

What should be counted as pay?

Equal pay legislation treats any pay element (for example, base salary, cash allowances, bonuses) as separate, and a claim can in theory be made based on any pay element – even if the total compensation between employees is deemed equal.

Pay mix can vary greatly between job types, organisations and industries and focusing on one pay element alone may risk missing potentially large elements of pay difference, giving a misleading result on the level of difference.

Our view is that any analysis should include base salary, cash allowances, and if relevant, the target value (£) of any short-term incentives (annual bonus/sales commission). Although it may be prudent to review actual incentive awards (rather than targets) in situations where awards are differentiated, consideration would then need to be given to the fairness of whatever process fed into award decisions which could be overly-complicated.

Ideally, these elements should be analysed independently but alternatively they could be analysed in aggregate as a total cash compensation figure. While a total cash compensation figure is unlikely to be considered in the event of an equal pay claim, analysing on this basis may provide a more accurate picture of the true level of any gender pay difference than analysis of base salary alone.

Where and how often should the gender pay difference be reported?

While annual reporting would align with other reporting processes, in terms of frequency, this may be onerous considering organisations will need time between gender pay audits to take any remedial action.

In our experience equal pay issues are not just about the absolute levels of pay, but often how pay (and performance or job evaluation) is managed, and particularly how pay decisions are made.

An organisation, which has concluded that they need to review their approach to reward management, may need at least two pay cycles (that is, two years) to implement any changes: the first year to make changes to systems, processes and policies and the second year to manage their pay under these new systems.

Our view, therefore, is that reporting every two years would be optimal, allowing an organisation reasonable time to plan and implement changes between cycles. To aid stakeholders to measure the success of such changes, we recommend organisations should also report their previous gender pay difference analysis, to allow easy comparison between results and demonstrate progress, or lack thereof.

Even if reporting only takes place every other year, we would encourage organisations to monitor the gender pay difference on an annual basis as a point of best practice, integrating this as part of the annual pay review.

How can organisations be best equipped for the disclosure?

Based on our experience of equal pay audits, there are several factors that may impact the time (and cost) to a company of reporting gender pay differences.

Organisation size and complexity will of course have an impact, as larger populations with more ways of organising their workforce (for example, pay data, number of job grades, functions, divisions and so on) require larger and perhaps more complex analysis. Larger organisations are also more likely to have special cases, such as expatriates and international assignees, which may require consideration as to how they are treated for analysis.

Beyond company size, the main influences we see on time and cost are the quality and accessibility of data. Organisations with up-to-date, good quality data, stored in a clean and efficient HRIS with easy reporting, will find reporting less time consuming, difficult or costly than others, as will those with robust, well governed job evaluation schemes.

Given the issues that the gender pay difference report may raise we expect that many organisations will want to include additional narrative on the gender pay report, for example to explain the methodology used or to provide any specific context (for example, a merger or divestiture) which may have impacted findings on gender pay difference. With this in mind, we believe organisations should be encouraged to provide additional narrative, based on guidance from the government.

While the regulations should follow in the first half of 2016, the exact timeframe for implementation is unknown.

We would recommend organisations take advantage of the time before the regulations are put in place to review their broader reward management practices and how this will support the equal pay agenda.

In particular, organisations should consider their job hierarchy, as this may form the basis of what are considered ‘comparable roles’ for analysis. Remember that equality is not necessarily about paying everyone the same, but having reasonable and fair reasons for paying people differently, such as performance and market differences. This places a much greater emphasis on organisations to ensure that they have robust and well documented practices in terms of performance management, job evaluation, promotion criteria, job moves and pay. In our view this is just good reward management.

For organisations which already feel well equipped to carry out such analysis, we would recommend performing an equal pay audit ahead of the regulations, based on possible disclosure scenarios, to build familiarity with the approach and likely outcomes ahead of public reporting.

How we can help

Towers Watson can help employers prepare for the new regulations using our tried and tested equal pay audit methodology (which was developed with the EHRC) to identify areas of potential risk and underlying reasons for any gender pay differences.

This often uses our GGS job evaluation system which has been independently audited and verified as fit for determining roles of equal value without gender bias. As we see the goals of good reward management and minimising equal pay risk as complementary we can also combine equal pay audits with broader reviews of the effectiveness of the reward management system in delivering organisational strategy.

This a summary of Towers Watson’s evidence to the UK Government consultation on gender pay disclosure regulations, outlining our views on good practice based on our consulting experience with other organisations managing reward systems and running equal pay audits and should not be construed as legal advice or guidance.

This article was supplied by Towers Watson.