It’s never been more essential for financial directors to take the lead in reviewing remuneration data frequently and identifying reputational risks within their organisations – especially when it comes to equality.
In a climate where employees are more switched on about gender pay disparity and equal pay, organisations must start to understand the risks; otherwise, we’ll see more equal pay issues continuing to arise over the next few years.
The Financial Reporting Council (FRC), the regulator accountable for the creation of the UK’s corporate governance code, recently took aim at several large listed companies for complying with governance rules for compliance’s sake—rather than achieve anything valuable.
But a change in the reporting framework, means that all listed companies with more than 250 UK employees will need to make a number of disclosures around pay equality this reporting season.
Given mounting pressure from the FRC’s new rules, remuneration committees, or REMCOs, are demanding data from organisations extending far beyond the typical CEO or gender pay ratios. They are looking for layered remuneration data across the entire organisation—covering a wider section of inequalities, including gender and ethnicity.
To stay on the right side of the REMCOs, investors, and employees alike, companies must have the remuneration data necessary to report, and be ready to explain any pay gaps. Non-compliance can do more reputational damage than publishing a poor result.
Transparency of data
While the new list of requirements is a lengthy one, effective compliance is essential to guarantee against risks arising from inequality claims. It’s integral that financial directors who are facing more risk-based responsibilities than ever before, incorporate the FRC’s requirements into a workable governance system, ensuring these demands for data are met with the utmost transparency.
A report by EY recently found that by exerting a higher level of engagement in workforce strategy, better business performance overall resulted. And this makes sense. From a strategic perspective, the FD is liable for moulding company direction – enhancing business performance and shareholder value. Shareholders and investors will often look to the efficacy of a business’s corporate reporting. Therefore a lack of due diligence could prove costly.
FDs might find that collating the necessary data without an appropriate reporting system could lead to a host of problems. What they need access to, is a real-time data analytics platform that incorporates both financial and employee-centric data across the entire organisation. It’s only through this kind of a reporting system, that risks can be identified, assessed and mitigated before it’s too late.
Reputational risks: inequality
Inequality accusations generate a considerable hazard to businesses. In the UK, several companies face billion-pound lawsuits arising from multi-claimant equal pay cases. The BBC is one of the most high profile. In 2017, the broadcaster published a list of employees earning over £150,000. The vast discrepancy between genders in several high profile positions led to widespread allegations of inequality, in turn prompting extensive restitution. Despite reparations, the BBC’s reputation still suffers.
They are not alone, either. Various UK retailers have incurred their own share of gender discrimination charges—many of which are yet to be resolved, and all of which could have been avoided with appropriate remuneration management and reporting. Tesco was slapped with a $4bn equal pay claim back in 2018, when it was alleged that female shop assistants earned significantly less than male warehouse workers doing equal work.
After the discovery, Tesco’s shares took a significant hit declining 25 percent over a three-month period. Whether this was directly related is debatable, but one thing is certain. With a robust and comprehensive total reward management system, such vulnerabilities can be eliminated. Using data to distinguish disparities across employee demographics, pay grades, and job descriptions could have avoided many of these claims.
Heightened scrutiny over equal pay, be it gender, ethnicity, or otherwise, is not going away any time soon. Financial directors need to be adequately equipped to handle this developing issue before reputational risks arise.