Demystifying the pay gap: How can organisations tackle pay disparities?

Mention the words ‘pay gap’ and you’re likely to find yourself embroiled in a fiercely contested debate. Whilst the gender pay gap has long been in the spotlight, any meaningful approach to pay equity needs to encompass the broader spectrum of protected characteristics, including race, ethnicity, age, disability, sexual orientation, social origin and more.

With International Equal Pay Day (September 18) bringing the concept of ‘equal pay for work of equal value’ once more into focus, we explore the wider realm of pay disparities and how this might be addressed as part of an organisation’s diversity, equity and inclusion (DEI) programme.

Understanding the pay gap

The pay gap represents the average difference in earnings between demographic groups in the workforce. Taking the gender pay gap as the most commonly discussed example, this represents the difference in median earnings between women and men, calculated by taking an average of the gender pay gap reported by individual organisations. Many countries, including the UK, require companies above a certain size to report annually on their gender pay gap, believing that transparency around such metrics can help champion gender equality and break the glass ceiling. However, an analysis of the reports found that four out of five UK companies and organisations still pay their male employees more than their female ones. Furthermore, it seems that reporting has done little to narrow the gap, which remains wide at 9.4%, the level it was at in 2017-18 when the legislation came into force. 

As Heather Hilsenrath, former CEO of the Equality and Human Rights Commission has pointed out, merely reporting the numbers is not sufficient to drive change, organisations should be required to publish action plans, with specific targets and deadlines alongside their pay gap data. 

Interestingly, The Council of the European Union has recently passed a pay transparency directive which goes beyond the UK’s gender pay reporting requirements. This will require companies with more than 250 staff across the EU to adopt a more advanced standard of pay reporting. Organisations reporting a pay gap of more than 5%, that cannot be justified, will be required to carry out a joint pay assessment in conjunction with worker representatives.  

The directive also provides access for justice such that workers who have suffered gender pay discrimination can receive compensation. What is particularly interesting here is the shift in the burden of proof. Traditionally this has fallen on the employee, however under the new directive it will be down to the employer to prove that EU rules on pay and transparency have not been violated. 

From a wider DEI perspective, however, the most significant change proposed by the directive is the broadening of scope to include intersectional discrimination, encompassing multiple forms of potential inequality or disadvantage including ethnicity and sexuality, as well as gender. 

Employee pay is one of the largest expenses of a company, driving performance and productivity. It can also be one of the most contentious issues that may result in expensive lawsuits or strike action; from the now famous Dagenham machinists strike of 1968, when some 200 women walked out of the Ford Motor Company plant in protest against their unequal pay, helping to bring about equal pay legislation in the UK, to the more recent class action against Goldman Sachs. Goldman’s faced allegations of widespread bias against women when it came to pay and promotions and although they denied any wrongdoing, agreed to an out-of-court settlement for $125 million. Successful legal action has also been brought about in the UK, most notably the case against Asda, finally decided in the Supreme Court after years of legal wrangling. In 2021, the Court ruled that shop workers (mostly women), can compare their work to those working in distribution centres (mainly men) and ask to be paid equally. 

Pay gap statistics and misconceptions 

Most recent gender pay gap data from the UK shows that around 80 percent of UK employers pay men more than women on average. Analysis by the Financial Times shows that in 2022, the gender gap fell in some sectors of the economy, but not by much, with the highest gender pay gaps reported in the finance, education and construction industries. 

Slow progress may be attributed to the lack of action taken by organisations to address this gap, as highlighted in GoodCorporation’s recent DEI report. Whilst most organisations surveyed undertook an analysis of workforce composition, there was a clear divide when it came to setting DEI targets for this, which can be crucial, particularly when looking at higher-paid leadership roles. 

For businesses, fixating on a percentage, or other statistics, distracts from the need to delve deeper into the root causes of pay disparities across protected characteristics and how each organisation’s own practices contribute to this issue. 

Pay disparity is multifaced, extending beyond gender and across the spectrum of different protected characteristic groups. It is therefore important to ensure that by addressing one form of disparity, it doesn’t lead to or perpetuate disparities for others. As such pay disparity should be considered as part of wider conversations around diversity, equity and inclusion. A fundamental starting point for organisations looking to tackle this issue therefore, is to begin with an analysis of the workforce and the current DEI landscape, to obtain a deeper understanding of how DEI is being managed and any specific challenges faced. 

It is also important to go beyond often quotes statistics: that “women earn 77 cents for every dollar men earn for work of equal value”; or that “worldwide women are more likely than men to be unemployed”. An over-reliance on such statistics in relation to pay gaps can lead to a simplification of the issue, and a tendency to look at the problem through a single lens, ignoring the many layers of discrimination and privilege that are often still applied, even if sometimes unwittingly. 

Considering pay gaps in their wider context therefore ensures that the multiple factors that contribute to pay disparities are properly taken into consideration. Occupational choices, education, career interruptions, negotiation skills on earnings, societal expectations and their effect on career paths, representation in leadership and specific industries and systemic occupation & industry ‘sorting’ of groups in society all contribute to the pay an individual will receive. And regrettably, discriminatory employment procedures still exist, which manifest in inequitable pay structures or promotion processes. 

Going beyond the gender pay gap 

What is interesting about the forthcoming EU directive is its broader scope, encompassing inequality for the wider group of protected characteristics. There is plenty of evidence that such gaps exist. PWC’s Ethnicity Pay Gap Report for 2021 found a pay penalty of 4.1% for UK-born ethnic minorities with an even greater penalty of 10.4% for ethnic minorities born outside the UK. The UK’s own 2021 census data revealed a 13.8% gap between the median pay for disabled employees and non-disabled workers, a gap that has widened since 2014 when it was reported at 11.7%. So, although equal pay is a concept enshrined in law across many jurisdictions, in some cases for over 50 years, the disparities can be significant. 

Aside from the obvious iniquities, why does this matter? Pay is a critical diversity issue, so any failure to address pay disparities is a failure to properly address diversity in the workplace. We also know from numerous studies that where DEI is successfully embedded, businesses are up to 36% more likely to outperform their less diverse competitors financially. They are also more likely to have higher retention levels, greater workforce engagement, the ability to attract top talent, better innovation and stronger decision-making. In other words, building an equitable, diverse inclusive workforce makes business sense. 

Within the EU it looks as if organisations will be required to look at pay disparities through a wider lens. This will mean embracing a more inclusive perspective and considering the broader spectrum of protected characteristics present in their workforce. It will involve the development of strategies that address pay equity holistically and transparently to foster an environment where all individuals are fairly compensated, and encouraged to thrive, irrespective of identity or background. 

Why transparency matters 

From a corporate perspective, transparency is a pivotal tool in addressing pay disparities. Whenever there is a lack of transparency, it is more likely to lead to a lack of equality and not just as regards gender, but for other protected characteristics as well.  

A lack of transparency in compensation practices can allow biases to thrive unchecked. Without clear visibility as to how salaries and promotions are determined, employees from marginalised backgrounds may be disproportionately affected by pay disparities which are often rooted in systemic differences, sometimes based on inherent prejudice (too strong?) and leading to the unequal treatment of workers. 

Transparency in practice would mean an openness to all about processes, policies, and criteria for decision-making related to compensation. This in turn helps to expose hidden biases and fosters accountability, encouraging organisations to challenge the status-quo and adopt targeted strategies to rectify pay disparity issues that emerge. In this way, transparency also encourages adaptability. DEI, like many other management issues, requires regular analysis and review so that any necessary changes can be made to help ensure best practice is followed.  

The subsequent management of any changes is also vital. In a recent interview with the Financial Times, DEI strategist Lily Zheng noted that “no DEI intervention is a silver bullet… that’s not how organisational change works.” Businesses require a “steady series of interventions that are reinforced from multiple angles” 

When it comes to managing equal pay, organisations should consider this as part of their wider DEI programme. Openly addressing the issue of pay equity and its connection to protected characteristics contributes significantly to the development of a workplace culture characterised by genuine equality and demonstrated inclusion. 

Steps businesses can take to tackle pay disparities 

GoodCorporation works with organisations to help develop, assess and improve their DEI programmes. The following steps are a useful guide for implementing responsible practices around pay equity. 

Step 1: Implement inclusive recruitment policies and practices

Use inclusive language in job descriptions to ensure engagement with different audiences and improve accessibility. Remove personal information such as names, genders, and ages from initial job applications. When it comes to the interview, focus on skills-based assessment tasks and structured interview formats, to help provide a level playing field for all candidates. 

Step 2: Regular analysis of compensation (pay equity audits)

Where possible, organisations should be regularly assessing pay and benefit structures to identify unexplained gaps in compensation, analysing this by gender, race, age, disability, and other relevant factors and taking intersectionality into account. Pay equity and wider DEI issues cannot be addressed without accurate data which can be used to set targets, drive improvement and consider where accountability should lie. 

Audits can also illustrate where salaries are being controlled or limited by other factors which could help illuminate whether disparities exist across the different protected characteristics groups.  

Step 3: Transparent pay scales and promotion criteria

Develop transparent and standardised compensation guidelines that explicitly consider qualifications, experience, and responsibilities, ensuring that they are followed without interference from factors such as personal biases, social backgrounds, or seniority within the company. This information should be made accessible to all employees.  

Salary ranges can be shared in job descriptions to encourage an equal playing field. This is also helpful when negotiating pay and ensures that all employees know what is reasonably expected for specific roles. 

It is also important to ensure that promotions are based on objective criteria known by all employees, providing equal opportunities for career advancement. 

Step 4: Ensuring open communication and feedback culture

Encourage open discussions about pay, providing channels for employees to raise concerns and give honest feedback without fear of retribution. Feedback mechanisms should be open to all staff for comments, easily accessible and proactive in soliciting suggestions about experiences with the organisation. 

Implementing pay equity 

Equal Pay Day provides an opportunity to consider pay equity as part of the diversity, equity and inclusion agenda. The benefits of effectively addressing DEI are clear. Research shows that diverse workforces deliver better decision-making in a work environment where people can thrive feeling appropriately compensated and valued which improves staff retention and overall sustainability. 

DEI is also increasingly regarded by investors as a vital ESG indicator for responsible business management. Businesses are being required to provide evidence of how diversity, equity and inclusion issues are managed within their organisations. The need to evidence pay equity, and/or the journey towards it, as part of a DEI strategy is firmly on the agenda and this requires an approach that embraces disparities related to race, ethnicity, age, disability and other similar factors. 

GoodCorporation is increasingly working with organisations to help develop best practice in this complex area, helping with strategy development, gap analyses, policy management, training, communications and speak-up.