ESG: Pay Gap Reporting – a tangible way to show progress under the S 

In the second of our ESG series looking at employment law and ESG, we explore the role of pay gap reporting as a way of demonstrating a company’s social credentials.

One of the central challenges for companies looking to improve their performance under the S is deciding what components to include and how to measure and publicise progress. As an employment team dealing with ESG related issues, the main recurring question coming through from clients is: what practical ideas do you have to implement initiatives under the S?

Reporting pay gaps is one meaningful way of providing equality data that can be assessed, benchmarked, publicised and also used to drive change. There are S actions here for all types of employer: organisations that already report their gender pay gap and are looking to extend the scope of their pay gap reporting, organisations looking to improve their current pay gap and organisations not currently covered by statutory gender pay gap reporting requirements, but considering voluntary reporting.

In this Law-Now we suggest ways in which organisations falling under all these categories can redouble their efforts in tackling pay gaps and consider what the future holds for pay gap reporting in the UK.

The S in ESG

To recap, investors are increasingly interested in purpose as well as profit. The social aspect of ESG covers how a business treats its employees, stakeholders, customers and suppliers. Diversity and inclusion is seen as one of the core components of the S in ESG.

While environmental sustainability has been an increasing focus for investors over the last few years, focus on social purpose is moving up the priority list. For example, in July 2022, the UK government launched a new taskforce to support the pension industry with some of the challenges around managing social factors, as a way of ensuring that focus on social factors continues to grow. Pay gap reporting is a clear way of providing D&I metrics which can otherwise be difficult to make tangible.

Overcoming a reluctance to publish

Many employers worry about publishing a figure which discloses a high pay gap. It was because of this reluctance that legislation was required to compel gender pay gap reporting, for employers of a certain size, in the first place. However, while having a higher than sector average pay gap can sometimes get picked up by the press, there has not been the wave of pay gap associated litigation that was initially feared. Instead the debate is evolving, emphasising instead the benefits of capturing pay data as the first step to identifying and assessing any issues.

In our view, employers who publish and acknowledge any disparity will be in a much better place to demonstrate a commitment to social sustainability than those who stay silent, whether those employers are caught by the current legislation or not.

However, reporting a pay disparity is not enough and taking action to remedy any gap is key. This year on International Woman’s Day (IWD), after an organisation tweeted its support for IWD, a pay gap bot instantly retweeted that organisation’s pay gap figure. In some cases this exposed a disconnect between rhetoric and reality.

Research has shown that some actions are more effective than others in tackling the gender pay gap. Concentrate on using steps proven to work! In 2021, refreshed evidence-based guidance on effective steps for tackling the gender pay gap was published by The Behavioural Insights Team in collaboration with the Equalities Office: The Behavioural Insights Team – How to improve gender equality report (bi.team). The guidance ranks actions as effective, promising and mixed in their impact on addressing the gender pay gap. The refreshed guidance includes the new effective measures of offering flexible working by default in job adverts and sharing local support for parental leave and flexible working.If you are reviewing your approach, a good place to start are the steps listed in the guidance as being effective, and considering if you can incorporate the steps in your revised strategy.

In addition, the Equality and Human Rights Commision (EHRC) and the Chartered Management Institute (CMI) recently published, Closing your gender pay gap: A toolkit for businesses with case studies from employers for others to take inspiration from. Measures discussed in the case studies include removing gender biased language from advertisements, offering all roles as being open to flexible working and investing in external data modelling support to provide a deep dive into the pay gap hotspots.

Gender Pay Gap

For those already reporting on gender pay gap, now we are 5 years in from it becoming mandatory, this is a good time to review your pay gap strategy. We still see pay gap narratives talk about using general diversity measures to tackle gender pay gaps rather than specifying targeted action. Analysing the data and understanding why the gap exists in your organisation specifically should always shape the strategy. A distinction needs to be drawn between factors that are outside an employer’s control in causing the pay gap, and those factors that are within their control.

The government was supposed to carry out a review of the gender pay gap regulations 5 years after they came into force, which should have been by 1 April 2022. This has still to happen. That is not to say that nothing is happening at government level in relation to gender pay transparency and equality. For example, in celebration of IWD in March this year, the UK government launched a pilot scheme on pay transparency requiring participating employers to list salary ranges on job advertisements and to refrain from asking about salary history during recruitment. Pay banding is not standard practice in the private sector and publishing pay ranges in an advertisement will be a novel step for many. Although in June Microsoft announced that they will start to disclose salary ranges for all roles in America, following a new state law on this issue which applies in Washington, in the UK, some organisations are looking to go further: # Show The Salary is campaigning for charities in the UK to publish their salary details to tackle the different pay gaps that exist in the sector.

Ethnicity Pay Gap

Despite an earlier consultation on this issue, it now appears that mandatory ethnicity pay gap reporting will not be introduced. Instead guidance will be issued to assist employers who want to report voluntarily. In March the government said the guidance would be published in the summer of 2022 so it may be published soon. This will be particularly important as there are a couple of key challenges that can act as blockers to those considering whether to proceed:

• Sample size: At present, there are 19 ONS classifications of ethnic groups but these are often grouped into 5 overall categories and employers commonly use broader categories, when publishing data. The Commission on Race and Ethnic Disparities (the Commission) in its report in 2021 recommended that employers report their data using different ethnicities to provide more accurate information as broader categories can blur disparities between racial groups.
• One option may be to use the government public sector classification structure once it is published. In July 2022 the government opened a consultation on draft standards for ethnicity data and its proposals for collecting, analysing and reporting on ethnicity data. The consultation closed on 30 August 2022, and is aimed at government departments and certain public sector organisations. However, private sector employers may find the final guidance (when it is published) useful when deciding how to collect ethnicity data.
• Data capture: Data capture is a challenge with ethnicity pay gap reporting because it requires self disclosure and, if the return rate is not high, this will affect the statistical analysis. Good communication and transparency is essential to encourage employees to provide this data; employers should look beyond gathering this type of data through application and diversity monitoring forms to forums such as staff surveys. Various layers of data protection compliance must also be followed around the data capture process including the identification of a lawful basis before processing this data.

However, a PwC study in September 2020, which surveyed over 100 businesses, found that 23% were already voluntarily publishing their ethnicity pay gap, up from 5% in 2018. Despite the challenges above there has to be an acceptance that there will always be some imperfections with a statistical system. The same could be said with gender pay gap reporting. Bear in mind that any form of pay gap reporting regime is not the end result; it is the start of the strategy. It also sends a powerful message to ethnic minority staff that this issue matters to an organisation.

Other gaps?

Two other areas, social mobility and disability are starting to be included in workplace reporting metrics, although they are the exception rather than the norm. For organisations that want to get started with disability reporting, the current Voluntary Reporting framework guidance is an excellent place to start. For social mobility there are two organsiations that provide user friendly employer guidance. We would recommend: Social Mobility in the Workplace: An Employer's Guide, by the Sutton Trust and the Social Mobility Commission guidance.

Making it count

There is no doubt that pay gap reporting is a fairly blunt tool, just looking at a single figure across a whole workforce. We know that when you drill down to national figures, for example, the gender pay gap really picks up for women in their forties, and below this it’s fairly equal. However, reporting pay gap figures alongside other workforce reporting metrics will demonstrate your organisation’s commitment towards social factors, particularly if it sits alongside an action plan and strategy for improvement. We recommend ensuring that any steps are then communicated externally as part of any reporting on the S in ESG and ensuring that HR links in with those involved in ESG communications. HR and reward teams should ensure that pay gap reporting data forms part of the company’s social disclosures in their ESG reports. In our next Law-Now in this series we look at different options for workforce reporting as part of the G in ESG.

To find out more about how we can help you with your ESG people strategy or diversity and inclusion initiatives please contact Catherine Taylor, Gillian MacLellan, Catriona Aldridge, Tracey Marsden or your usual CMS employment team contact.

The authors would like to thank Clare Heggie and Michelle de Santis, Associates at CMS, for their contribution to this article.