Gender pay gap reporting Contents

4Tackling the gender pay gap

47.The new transparency and accompanying public scrutiny will, in itself, help to tackle the unacceptably wide gender pay gaps in so many organisations. Evidence suggests that the reputational damage wrought by the publication of these figures is likely to be the most effective spur to action, and that businesses are under no illusions about this.102 The introduction of gender pay gap reporting has consequently already had an impact on changing behaviour in many organisations. Several companies have re-examined the statistics they initially published because of the public reaction. But the initial flurry of attention associated with the revelation of the size of the organisations’ gaps is likely to fade in a year or two. We do not believe that this public naming and shaming on an annual basis will be enough, by itself, to remedy the situation in the long term.

Understanding the causes

48.We refer in Chapter 3 to some of the causes of the gender pay gap at a societal level and that those already identified do not explain the size of the gap. The explanation for at least a proportion of the gap is likely to be found in the practices, policies and cultures of our businesses and organisations. It is up to them, in concert with sector representative bodies and others, to use the figures they have reported to interrogate the causes of their pay gaps. We have referred to evidence indicating that, in general, women start on an equal footing but then do not progress up the promotion ladder as fast or as often as male counterparts. Research suggests that they are less likely to be promoted than men after starting a family.103 We have also mentioned the maternity penalty and the part-time penalty. In addition, there are also behavioural issues, which may vary in impact from one sector to another. For example, some research indicates that men are far more likely to apply for promotion without the full range of skills required.104 Laura Hinton from PwC explained that their work had established that women there were as ambitious as men but it took them longer to achieve promotion.105 They may not be encouraged to push for promotion when they have young children or are reluctant to do so. The Chief Operating of FDM Group, Sheila Flavell, told us that “Women lack confidence, and that is a fact … the main problem we have with returners is that they are not confident; they do not feel they are good enough … With women, you have to push them. You have to push them and you have to pull them. You have to continuously instil confidence in them, in my experience.”106 Businesses and organisations need to be conscious of these factors, particularly when determining support provided for returners and promotion policies.

49.Other evidence suggests that women are less aggressive than men in negotiating their pay—there may be other factors that tend to be more important to women, such as flexible working—and that they are more resistant to moving, so potentially less inclined to walk away in pay negotiations.107 If this is right, the determination of pay via individual negotiations rather than by collective pay bargaining is likely to be pushing the pay gap wider rather than closing it. The disclosure of huge differences in the levels of pay between male and female senior executives and those working for the BBC was a catalyst for that organisation to address the unfairness inherent in its own practices. Without this transparency—which the BBC resisted—there would have been no change. It is up to organisations to identify for themselves the reasons behind their own gender pay gaps, but greater transparency in their policies is likely to help address the issue and foster greater confidence in and outside those organisations of their commitment to securing the unquestionable equal treatment of women and men. Increased transparency may be uncomfortable for some individuals, and needs to be handled with care for data protection reasons, but a cultural shift towards greater transparency on pay is a necessary part of long term efforts to remove the gender pay gap and should be encouraged.

What works?

50.Many companies will have been surprised to find they had a gender pay gap at all, and no doubt many would have no idea how such gaps emerged; still less, how to close them. We have argued that it is up to each organisation to look hard at its own policies, practices and working culture to establish what action needs to be taken. Each organisation is different and will have different issues to address. For example, we heard reports of a bank that found women scored higher on appraisals but men had higher bonuses.108 There may be a whole host of unconscious biases and assumptions in play which contribute to the overall pay gap. These need to be investigated, tested and rooted out, company by company.

51.Whilst it is up to businesses to address their own pay gaps, they can expect to have access to advice and support from experts, and to build upon the growing body of best practice evidence. This should be disseminated by sector bodies and business organisations and campaign groups such as the 30% Club, or the Hampton-Alexander Review into board diversity.109 There are 1,377 employers (13% of the total) with reported gender pay gaps in excess of 30%.110 There is undoubtedly a long way to go for many, but success is achievable. For example, Unilever has pursued a swathe of policies which has resulted in half of all management positions being taken by women and a pay gap of 2% in favour of women.111 Different solutions will be required for different companies and there may be sectoral factors at work that require a sector-based approach. For example, retail is heavily reliant on part-time, predominantly female staff, which may affect the fairness of commission-based rewards if not carefully designed.112 We heard the case for simplicity, as well as transparency: the founder of the Equal Pay Portal, Sheila Wild, told us that “As a rule of thumb, the simpler the pay system, the less likely you are to get a gender pay gap.”113

52.The evidence we have received has identified a range of initiatives, practices and policies that have been used to address the gender pay gap. We list some of these below:

53.There are a vast number of ways in which organisations can tackle their gender pay gaps. We do not believe that there is a one-size-fits-all set of measures that each should adopt. It is not for Government to prescribe the precise measures to be adopted, although it has a role in setting the policy landscape, as discussed below. Organisations cannot rely on excuses about societal attitudes and trends to avoid examining their own contribution, conscious or otherwise, to their gender pay gaps and the effectiveness of their measures to address them. They must take responsibility for closing these gaps by taking effective action. We conclude that it is up to organisations themselves to identify which measures are most likely to work for them and, as indicated, earlier, to report on these steps in an action plan to be included as part of reporting on their own gender pay gaps. Businesses should recognise the business case for maximising the contribution that women can make and reform policies and practices, notably around rewards for part-time work and promotion, that contribute to perpetuating the gender pay gap. If organisations fail to act effectively, more intervention may be required.

Setting targets

54.The setting of targets has been a driver of achieving greater representation of women at senior levels in organisations and improving diversity more generally. We discuss below the impact of setting targets on improving board diversity, for example. Organisations should be ambitious and set stretching targets that are right for their circumstances. Targets may potentially relate to recruitment or proportion of women at different levels of seniority rather than the gender pay gap itself. The potential pace of reducing the gender pay gap figures is affected by the existing workforce structure and can always be affected by major events such as mergers and acquisitions. We have argued that it is right that companies take responsibility for examining their own circumstances, diagnosing the causes of their own pay gap and setting their own ambitious but realistic targets. We heard that PwC had tangible targets for senior managers across all of its 40 separate business units.125 These may be for the near or longer term: companies with a high gender pay gap may reasonably expect the reduction and eradication of their pay gap to take longer. For example, Linklaters set itself a target of doubling the number of women on its governance and management boards, albeit to a still-low 30%.126 Witnesses argued that it may in fact be unrealistic to pursue a pay gap of exactly zero due to the effects of routine changes in personnel, but a range of plus or minus 3% would be indicative of a properly gender balanced workforce that companies could be expected to maintain.127 We agree. A step by step by step approach with tiered targets over time may be a sensible way forward.

55.In setting targets, organisations should balance the pressure for securing visible signs of progress in the short term with the need to secure long term sustainable solutions. For example, if a company, in an effort to make long-term improvements in the pipeline of senior women, recruits a higher proportion of women at the start of their career, their pay gap may actually increase for a few years, before these women rise through the ranks.128 This underlines the need for a narrative to accompany the bald figures. The wide variations in the size of the gaps between different sectors can be explained in part by employment patterns which may take some time to shift. Some elements of solutions, such as careers advice/skills, are best progressed at a sectoral level, and responsibility must be accepted by the relevant trade bodies and representative groups. A blanket target across the economy would be a blunt and inappropriate tool with which to tackle the problem. However, there are wide variations in the gender pay gaps of companies within the same sector, reflecting the different approaches used by companies and also, no doubt, different degrees of commitment to reducing the gaps. We recommend that sector representative bodies work with their members and other stakeholders, such as the Chartered Institute of Professional Development and the trade unions, to develop and publicise ambitious and stretching long term targets for reducing gender pay gaps. They should also develop practical guidance on what measures have been found to work most effectively in their sectors and encourage best practice in implementing such measures. If such stretching targets are not established, the Government should be prepared to step in and set mandatory targets on a sector by sector basis.

Driving Change

Role for boards

56.No matter how many eye-catching schemes and initiatives a company introduces, without visible and convincing leadership and commitment from the board, they are liable to fail. Analysis suggests that 93% of men work for a company that pays them equally or better than women.129 The width of the gender pay gaps at many of these companies indicates that far too few have been taking effective steps to ensure acceptable levels of gender diversity across all levels of the workforce. Close the Gap reported on their research about Scotland which showed that while almost all companies had an equal pay policy in place, less than a third had undertaken a gender pay review and only 3% had taken any action to address pay gaps.130 Research by the Government Equalities Office indicates that the vast majority of employers surveyed had no pay reviews planned because they considered they already provided equal pay.131 This points to a lack of recognition or understanding of the difference between equal pay and the gender pay gap. There may be practices in place that are not directly discriminatory (and therefore illegal) but, perhaps unknowingly, nonetheless contribute to perpetuating the gender pay gap.

57.Even those companies genuinely committed to reducing the gap have to work extremely hard to accurately identify and address the causes of their pay gaps. We heard from PwC that they had concluded that their programmes and support mechanisms were “not moving the dial”;132 too much focus had been on women to change, rather than a focus on changing the culture of the organisation.133 Cultural change needs to come from the top, and a diverse board will help in this process. According to the Financial Times, companies with female chief executives have an average median gender pay gap of 11 per cent, compared with 17.4 per cent at companies where the chief executive is a man.134 This argument stands on top of the existing weight of evidence on the positive impact of board diversity on company performance.135

58.The campaigning group, the 30% Club, told us that if an issue is not one of the leadership’s top five priorities, “nothing is going to happen”.136 Sheila Flavell, CEO of FDM Group, explained why the median gender pay gap is non-existent at her company: “It is a commitment from the top. It is just embedded in the culture of FDM”.137 Laura Hinton from PwC agreed that it was about leadership and “tone from the top”. This is borne out by statistics showing that women CEOs have more than twice the number of women on their executive committees than male CEOs.138 Addressing the gender pay gap should be made a priority and be reflected in reward structures. If a proportion of the Chief Executive’s bonus was dependent on reducing the gender pay gap over time, progress might be quicker, and there are established means of holding the CEO to account. In companies that have significant pay gaps, relevant board members, including CEOs, should have appropriate objectives and Key Performance Indicators.139 We heard from the 30% Club that 36 CEOs in the FTSE 100 had signed up to targets for 2020.140 We trust that this figure will rise significantly by the time of next year’s annual reporting cycle. Companies at which there is a demonstrable commitment to promoting gender equality at the highest level are also more likely to attract more women in the first place. We recommend that company boards introduce Key Performance Indicators for reducing and eliminating their pay gaps and that Remuneration Committees, in reporting on pay policy, should explain how this commitment to reducing the pay gap is being reflected in their decisions.

Role for Government

59.Whilst businesses need to take action to address their own pay gaps, it is up to Government to set the agenda and drive the pace of change, using all the policy tools it has at its disposal. The Government’s approach must be joined up; many different departments have a role to play. From the very start, education policies need to avoid gender stereotyping; the pay gap will only diminish in the long term when more equal numbers to go into both the high and lower paid sectors and roles. We have referred to the motherhood penalty; the Government should work with businesses to devise policies that provide support for those returning to the workforce after breaks for family or caring leave. Both Government and businesses should address the stereotypes that see mothers bearing the larger share of caring responsibilities and seek to ensure that pay policies do not inadvertently reinforce them, for example in granting caring leave.141 There are strong arguments that the cost of childcare, which are relatively high in this country compared to many in mainland Europe and increasing much faster than wages,142 needs to be brought down, in order to make a return to work more financially attractive. We are not persuaded that all parts of Government are sufficiently joined up on this issue to ensure that policy decisions in different departments consciously are supportive of addressing the gender pay gap. We recommend that the Government Equalities Offices makes clear in its annual report the steps it is taking to co-ordinate government policy on this issue.

60.The Government should also lead by example. At the moment, it is failing to do so. All but three Government departments have a gender pay gap in favour of men, with the only the Department of Health and Social Care seeing women being paid, on average, more than men. The Department for Transport has the highest median gender pay gap, of 22.6%.143 We have already drawn attention to the lack of women appointed to executive roles in partner organisations to the Department for Business, Energy and Industrial Strategy: seven out of 47 Chief Executives and only four Chairs are women.144 The Department itself has a pay gap of 15%, well above the average of all departments of around 10%. Parliament itself also has work to do. Whilst the median gender pay gap in the House of Commons is less than 2%, the top pay quartile is predominantly men and the median bonus gap is 43% in favour of men.145 We recommend that Government departments with significant gender pay gaps set ambitious targets for reducing such gaps and report on progress each year.

Long term

61.It is important that the Government works on a cross-party basis to establish and pursue policies that will need to extend beyond one or two Parliaments. We are in no doubt that the elimination of the gender pay gap will take time; the Prime Minister has spoken about closing the gap for good within a generation.146 Those sectors that rely heavily on STEM graduates may have to work particularly hard to effect change. Some 15% of engineering graduates in 2017 were female.147 Construction companies told us that even if there were a significant increase in the numbers of women starting next year, it would take “more than a decade” for these women to begin to have an impact on the pay gap figures148 and in the short term the figures may get worse as they recruit at lower levels.149 In the technology sector, witnesses thought that the gender pay gap might be closed in ten years.150 Witnesses from airlines and the engineering sectors stressed that, given current low levels of women in the sectors, it would take time for current efforts on recruitment to filter through to improved figures and were not prepared to venture a time scale.151 In law firms and audit companies operating as partnerships, partners tend to remain for a long while,152 so quick solutions are difficult. We recognise that solutions are complex and involve, to some degree, cultural change which takes time. However, the fact that the road may be long must not stop companies starting down it at pace; the overall rate of change in society depends upon the ambition and commitment of the companies and organisations forming the backbone of the economy.

Role for businesses in procuring services

62.Businesses themselves have a role to play in promoting diversity when securing services from other businesses. When providing teams of consultants or bidding for work, companies are increasingly being asked to demonstrate their commitment to diversity by delivering their services with gender balanced teams.153 But this is far from universal practice at present. Peer to peer business pressure has a crucial role to play in changing the expectations and norms around best business practice. This is an opportunity for businesses to drive change. We recommend that businesses and organisations in the public and voluntary sectors should make it standard practice to include a tangible commitment to diversity in any tendering exercise or other provision of services.

Role for investors

63.Similarly, shareholders should be demanding greater diversity, and challenging boards to demonstrate that they are taking action to address gender pay gaps. Following the Hampton-Alexander Review, established by the Government in 2016, there is a target of one third of executive positions in FTSE 350 companies being held by women by 2020. There has been good progress towards this target: the latest figure is 28%. The number of all male boards on the FTSE 350 has fallen from 152 in 2011 to ten this year, although it is still depressing that there can be any all-male boards still left.

64.Unfortunately, it is clear that some old-fashioned attitudes to the role of women in the workplace still linger in some of the boardrooms of our biggest companies. Comments from Chairs and CEOs of FTSE 350 companies explaining why they had not appointed more women to the board were recently published by the Hampton-Alexander Review. They make astonishing reading:

Comments such as these serve to explain why the numbers of women appointed to boards in executive roles have been so small. Whilst women now account for 28% of directors in the FTSE, there are still only 24 female executive directors in the FTSE 100 and only 61 in the FTSE 350.155 There are still only 19 women Chairs in the FTSE 350.156 Nearly a quarter of FTSE 350 companies have no women on their executive committees and the proportion of women making up executive committees has remained at only 16% for the last two years.157 This imbalance does not chime readily with the messages we get from business leaders about the importance of supporting and promoting women to fulfil their potential. There is clearly a long way to go before women are universally accepted as capable of running large companies and contributing fully to their management. The low numbers of women in executive positions can only hinder progress: gender pay gaps are highest in sectors with some of the lowest numbers of women executives158 and the five companies in the FTSE 100 with all-male executive boards, and that are required to report, all have gender pay gaps well above average, including one with a gender pay gap of 46%.159

65.We were encouraged to hear that investors, through the 30% Club, are now collaborating more on exerting influence, on a cross sector basis.160 Major institutional investors are in a position to drive change and some of them are now doing so. The Director of Corporate Governance at Legal & General Investment Management, Sacha Sadam, recently asserted that they “see diversity as a key business issue” and have been voting against all male boards since 2015.161 We see no reason why any investors are still voting for all male boards. The major investors should be setting an example in responsible stewardship and asserting themselves to ensure that diversity is reflected more visibly, at board level. Shareholders should be holding to account those executives who do not meet their objectives and fail to take sufficient action to address their gender pay gaps. At present, there is no mention at all of diversity in the Stewardship Code,162 which provides guidance, on a comply or explain basis, to institutional investors in UK listed companies. Similarly, there is no encouragement or guidance for investors to apply pressure to companies to meet their obligations under the Corporate Governance Code (see below). The Stewardship Code is due to be reviewed later this year. We recommend that the Financial Reporting Council’s proposals for a revised Stewardship Code include reference to ensuring that gender diversity is properly reflected throughout the company, notably at board level.

Role for the regulators

66.Reducing the gender pay gap goes hand in hand with efforts to address the lack of diversity in too many boardrooms: there are still around 100 FTSE 350 companies with one woman or none on their boards. The links between diverse boards and better decision making are well established.163 This is about improving performance as well as fairness. The drive to improving diversity should therefore be fully reflected in the regulatory landscape. The Financial Reporting Council’s (FRC) revised Corporate Governance Code, published on 16 July 2018 makes more explicit reference to diversity than its predecessor. It advises that appointments are made on merit against objective criteria, and that companies, in making appointments, should promote “diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.” It also requires them to report on how they are improving the diversity of the senior staff pipeline and to explain how the implementation of its policy on diversity and inclusion have been implemented and how they serve strategic objectives.164 It also stipulates that the remuneration committee, in reporting on pay policy, should seek to justify executive pay with reference to measures including pay ratios and gender pay gaps.165

67.Whilst these revisions are an improvement, we still do not believe they go far enough in directing companies to take specific steps to address any gender pay gaps that they may have. We have called for a commentary on the gender pay gap figures and action plan to address it to be included in remuneration reports, as part of the reporting cycle. We support the provisions in the new Corporate Governance Code to improve reporting obligations on actions taken to increase diversity in the management pipeline and the broadening of its interpretation of diversity. But the revision could go further. We regret that the Financial Reporting Council has not included specific provision for reporting requirements to include measures to be taken to address any gender pay gap. We urge the Financial Reporting Council to monitor the quality of reporting on gender diversity and the pay gap in annual reports and to press for improvements where necessary.

102 Close the Gap report that a survey in 2017 found that 84% of businesses believed that the gender pay gap would damage the reputation of organisations (CPG0015)

103 City a.m. Women are less likely to be promoted after starting a family, 30 October 2017; see also Business Insider article, 1 October 2015.

104 Q142 [Sophie Dekkers], see Harvard Business Review articles, February 2017 and August 2014

107 Q42; A Workforce Mindset Study in 2015 by AON found that men allocate more value to pay than women and women allocate more value to paid leave and work/life balance than men. Studies have found that women are less likely to negotiate their salaries than men, e.g.:Why women don’t negotiate their job offers, Harvard Business Review, June 2014.

108 Q43 [Brenda Trenowden]

109 See paragraphs 63–4 for further discussion of the Hampton-Alexander Review.

110 For example, Phase Eight reports a 54.5% median pay gap in favour of men, and has a reported 97.5% female workforce. Figure based on analysis of reported data for 2017–18.

111 Unilever, Gender Pay Gap Report 2017. At Unilever, the proportion of women in management positions improved from 42% in 2010 to 51% in 2017.

112 Hugo Boss (CPG0019)

114 PwC told us that 24% of female partners and 9% of male partners worked on flexible contracts [Q178]; Q20 [Alice Hood]; Easyjet have pilots working half-time and promote part-time working Q81 [Sophie Dekkers]

115 Q31, provided by Aviva, for example.

116 Q176 [Laura Hinton]

117 Eg at Slaughter and May; Q171 [Louise Meikle] and Vodaphone, Q61 [Brenda Trenowden]

118 Q97 [Kevin Goodman], set up by Easyjet and Babcock for example

119 Q100 [Kevin Goodman]; Q122 [Sheila Flavell]

120 Q17 [Alice Hood]

121 Q81 [Sophie Dekkers] and Q176 [Laura Hinton]

122 Q119 [Sheila Flavell]

123 Q87 [Sophie Dekkers], for example 20% by 2020 for Easyjet

124 Q218 [Sheila Wild]

125 Q174 [Laura Hinton]

126 Linklaters, (CPG0020)

127 Association of Accounting Technicians (CPG0005); Q32 [Brenda Trenowden]

128 Association of Accounting Technicians (CGP0005)

130 Close the Gap (CGP0015)

131 As above

133 Q204 [Laura Hinton]

135 Q17 [Sam Smethers]; research by McKinsey & Company, Delivering through diversity, January 2018, indicated that for every 10 percent increase in gender diversity at a senior level in major UK companies, EBIT rose by 3.5 %. See also MSCI blog, The tipping point: women on boards and financial performance; The Pipeline, Women Count 2018, July 2018

136 Q20, [Brenda Trenowden]

138 The Pipeline, Women Count 2018, July 2018

140 Q35 [Brenda Trenowden]

141 Q31 [Brenda Trenowden]

142 Q31 [Alice Hood and Sam Smethers]

143 Financial Times, Government departments reveal gender pay gap, 18 December 2018

144 Letter from BEIS Permanent Secretary to Committee, 18 April 2018. The figure for Chairs includes the Pubs Code Adjudicator and the Groceries Code Adjudicator.

147 Balfour Beatty (CPG022)

148 Balfour Beatty (CPG0022)

149 Q95 [Jo Volk]; CIPD (CPG0018)

150 Q141 [Sheila Flavell]

151 Qs 142–3 [Sophie Dekkers and Jo Volk]

152 Q227 [Louise Meikle]

153 Q131 [Sheila Flavell]

154 BEIS, News story, 31 May 2018

155 Q135 [Sheila Flavell]

156 The Pipeline, Women Count 2018, July 2018

157 The Pipeline, Women Count 2018, July 2018

158 The Pipeline, Women Count 2018, July 2018

159 Hampton-Alexander Review, FTSE Women Leaders, November 2017. The five companies are Barclays PLC (14%), BP PLC (19%), Provident Financial PLC (31%), Smurfit Kappa Group PLC (15%) and St James Place PLC (46%).

160 Qs 35 & 65 [Brenda Trenowden]

161 Quoted in BEIS, News story, 31 May 2018

162 FRC, The UK Stewardship Code, published in September 2012

163 Eg EY, Women: Fast Forward, 2015; The Pipeline, Women Count 2018, July 2018

Published: 2 August 2018