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Equal Measures

The High Pay Centre's response to the government's consultation on new gender pay gap reporting requirements

By Paul Marsland, deputy director, High Pay Centre

The decision by Nicky Morgan, minister for women and equalities, to require publication of the difference between pay for men and women is great news. Inadequate human capital reporting for listed companies in particular has frustrated investor engagement on what is a material financial issue.

Better still, the measures chosen for disclosure of basic income include the mean and median pay gap.  Any skew in the income distribution is revealed by simultaneous disclosure of these measures, and the trend in this skew data will over time present evidence of whether a company’s policy towards gender pay equality is sustained.

As the consultation on the Gender Pay Gap (GPG) rules closes we believe there are some important decisions remaining which will determine if the new rules deliver optimal information for shareholders, employees and other stakeholders.

Alignment with the UK Companies Act

In choosing to take a snapshot of pay each April the government has opted for simplicity at the expense of wider utility. However, the choice of a fixed period in April each year creates asymmetry with practically the only company-specific data on workforce pay which must already be disclosed by larger companies.

In the UK listed companies must disclose the average number of employees in the financial year being reported on. The average number of employees required by s411 of the Companies Act 2006 subsection (1)(a) or (b) is determined by dividing the relevant annual number by the number of months in the financial year. What the Act refers to as “the relevant annual number” is determined by counting the number of persons employed under contracts of service by the company in that month, then adding each month’s total and dividing by the number of months in the financial year.

In contrast the GPG measure uses the number of employees who were paid according to their usual arrangement with an employer in the period within which 30th April falls. These numbers are potentially different. A temporary worker employed for part of the year counts towards the Companies Act figure but not towards the GPG figure (unless employed around 30th April).

Due to this exclusion of leavers, businesses which rely on seasonal low paid temporary workers (amongst which group women are typically over-represented) will show a figure that excludes the impact of this hiring pattern. This may lead to under-reporting of any gender pay gap that exists.

The GPG measure has been chosen to coincide with the measure used by the Office of National Statistics (ONS) for the Annual Survey of Hours and Earnings (ASHE). In deciding to go with this measure the government deserves credit for linking pay to number of employees rather than the aggregate hours worked by employees. The hours used to determine the hourly rate of pay for the GPG are “for each relevant employee”. Without this important caveat a full-time equivalent (FTE) figure could be used which would serve to under-report the average wage level for both men and women.

Companies Act s411 allows directors to choose how to segment the data required about the number of employees. The wages and salaries figure is always group wide and never disaggregated. Very few listed companies choose to present a geographic breakdown of employee numbers, with the result that the listed company footprint for employment in the UK is unclear. An average wage calculation for a UK incorporated UK listed company can only be done on the basis of all employees, regardless of their location. Some large cap UK groups have employees and operations in well over 100 countries.

Regulation 7 of the proposed new GPG rules requires companies to publish the number of UK employees (in quartiles, by gender). This introduces the possibility of a company-specific, UK only average wage which can be compared with the official ONS figure for the national average and median wage in the UK. This is a good start, but without a geographic breakdown of male and female employees and their relative pay some UK companies which are able to show they have addressed their UK gender pay gap will fail to expose significant gender pay gaps in their workforce elsewhere. Companies have an opportunity to show commitment to gender equality by going beyond a compliance approach and providing an international breakdown.

Alignment with the 2013 directors pay regulations

The new GPG reporting will not start until 2017 at the earliest and it will be interesting to see if companies use the months leading up to its introduction to review all aspects of their human capital reporting. Without encouragement towards such a review there is a danger that gender reporting is viewed in isolation. For example, companies taking a holistic approach might consider how gender reporting affects their response to the 2013 pay regulation requiring consideration of pay elsewhere in the workforce in setting directors’ pay. A government report on compliance with the new regulations, published in March 2015, cited evidence that some companies made no statement or mention at all of the pay elsewhere in the workforce, whilst a significant proportion of companies in the sample failed to say how pay elsewhere in the workforce was taken into account.

The GPG definition of bonus pay is a bonus that has been “received and earned”. This is different to the definition for bonus introduced by the 2013 director pay regulations, which requires disclosure of bonus that has been “received” or is “receivable”. This opens possibility of a different definition applying to bonus earned for the purpose of the 2013 pay regulations and the GPG regulations.

The GPG definition of pay includes LTIP amounts within “bonus”, although it is not clear from the rules how LTIP is to be defined. If one assumes valuation according to Para 2c of the draft statutory instrument, then LTIPs will be valued at the cash equivalent value of shares at the date of payment. LTIP payments disclosed under the 2013 regulations as part of the “single figure” are often not the cash equivalent value of shares on date of payment. These values are often restated in the following years annual report to reconcile the difference between the cash value actually paid and the value of shares presented at an assumed date prior to the completion of a vesting period. These differences can be significant in the context of an individual’s pay, and may be relevant to the intent of the GPG rules where an individual’s pay forms a significant proportion of pay in a quartile.

Alignment with CRD IV

Under the most recent version of the EU Capital Requirement Directive, implemented via the European Banking Authority rules and the Remuneration Code adopted by the Financial Conduct Authority (FCA), certain financial sector companies are now required to defer bonus payment over a number of years and to pay a proportion of bonus in the form of shares. Differences between these rules are already apparent due to potentially conflicting definitions of “Identified” staff in European rules and “Code” staff in UK rules. Where a firm has a materially significant bonus pool the issue of whether deferred bonus is equivalent to “earned” bonus becomes relevant to the intent of the GPG rules. It is not clear for example whether the possibility of clawback or malus affects the definition of “earned” bonus for the purpose of rule 6 of the GPG rules.

It is worth noting that the rules imposed by EU’s Capital Requirement Directive and adopted in the UK via the FCA remuneration code are extra-territorial in that for EU headquartered firms they apply to employees of subsidiaries outside the EU whereas the GPG rules do not. There is a risk here that companies are forced to treat an employee’s bonus differently for the purposes of the UK’s gender reporting rules and the EU’s banking regulation.

CRD IV introduced a limit on the percentage of salary that might be paid as bonus by those firms to which it applies. Financial sector companies responded by adopting “role-based” pay which is neither salary or bonus. The intention has been to avoid compliance with CRD IV solely by increasing salary or reducing bonus.

For the avoidance of doubt, it may be useful for the GPG regulations to future proof a pay definition by the explicit requirement to include within either salary or bonus any alternative category of pay which emerges from efforts to circumvent the CRD IV bonus limit.
Opportunity to address public trust in business

Whilst the use of a gross hourly rate of pay is consistent with existing ONS methodology its use presents a conceptual problem. It is not appropriate of course to express variable incentive pay derived from LTIP payments as an hourly rate of pay. Such pay bears no relationship to hours worked. There is no attempt in the rules of LTIPs to establish a relationship between the award /pay out and the number of hours worked.

However, the absence of variable pay from the quartile disclosure distorts the picture which emerges of a company’s true income distribution. This is particularly true of listed companies.

The exploration of how best to present income distribution data for the purposes of the GPG is an opportunity to address an acute absence of proper information about how the benefits of economic growth are distributed within firms. The governments focus on productivity improvements formalised via its 2015 Productivity paper recognises that growth must precede wage increases. However, the paper also recognises that companies have failed to distribute the benefits of growth fairly hence the welcome introduction of a higher level of mandatory minimum wage.

Excessive executive pay is the most important factor in undermining much needed trust in business, and excesses are most visible within public listed companies. The government has been courageous in tackling gender inequality, and via these regulations now has an opportunity to address this deficit in trust head-on by requiring public companies to presenting total income in quartiles alongside basic income (defined as “pay” in the GPG regulations).

Posted on 15 March 2016

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