Fair pay part 2: what is pay fairness and 'pay equity'? Why aren't HR getting it right?

After considering the current UK pay environment in Part I, in this second part of my extended blog i look more at the theory and meaning of fairness, as well as the newly-popular theme of 'pay equity' and why employers and HR are commonly failing to deliver on it. The final Part 3 will look, most importantly, at what we all need to do to deliver fair pay in practice.

What's Fair?

I share the ideas of the 20th century American political philosopher John Rawls with my CIPD students in helping us to think through what fairness means and how we might come closer to delivering it in our pay and reward management practices. His most famous work on Justice as Fairness was published almost exactly 50 years ago and has influenced many thinkers and politicians since then, including our current Labour party .

In it, describes the ideal society being underpinned by operating according to two basic principles:

-??????? Principle 1: the basic liberties principle – that everyone should have equal rights and equality of opportunity, but that in order to be fair and to deal with potentially conflicting rights,

-??????? Principle 2: the difference principle should also apply, which is to justify difference in treatment only if can be shown to benefit the worst off.

Many would argue that the UK is far from this ideal and at least since the 2008 financial crash, has been moving in the opposite direction, benefitting executives and the best-off.

Coming up-to-date, according to the TUC , ‘Union?representatives will seek to ensure that working people receive?fair pay, reflecting the rate for the job and the need to maintain their living standards’, as well as ‘ensuring workers do not face pay discrimination.’

Many of us agree. Polling of the general public by the Fairness Foundation earlier this year found that two-thirds of us agreed that ‘people not being able to meet their basic needs because of the cost-of-living crisis’ is a major issue in the UK, while 53% felt similarly about ‘people not getting a fair pay for a day’s work’.

Whatever the philosophies and your political views, there can be no doubt that the worst-off and lowest-paid workers, and the women and ethnic minorities who are heavily over-represented amongst the three million plus earning less than a real living wage, have suffered disproportionately badly from the Covid and now cost-of-living crises.

What's Unfair?

Health-wise, front-line care and retail workers experienced the highest occupational mortality rates during the pandemic. As?Professor Sir Michael Marmot ?quoting Camus expressed it at the time, ‘pestilence brings the hidden truth of a corrupt (and divided) world to the surface’. His research has highlighted the critical impact of under-investment in health and wellbeing, by government and employers, on the economic as well as the physical and mental health of employees.

The latest employment figures from the ONS reveal that a record 2.5 million UK employees are unable to work on the long-term sick list, intensifying labour shortages and the intense work pressures on employees in areas such as the NHS and social care.

And as well as having less money to cope, the lowest paid suffer proportionately harder and experience effectively a 50% higher rate of inflation than the rest of us, as so much of their income goes on essentials like food and energy which have experienced some of the highest rates of price growth. According to the Joseph Rowntree Foundation low-income families have been living through a?‘frightening year of financial fear’ . JRF have recently helped the CIPD to set up an ‘In-Work Poverty’ resource area on their website.

Its bad for low and now with the hike in rents and mortgage rates averagely paid workers as well. But not for everyone. The earnings of higher-paid employees have steamed ahead at much faster rates of growth than the overall economy and general rates of inflation. By 39%, for example, for the chief executives of our largest FTSE 100 companies last year, according to?the High Pay Centre’s latest annual survey .

Bizarrely, the crises of Covid and cost-of-living have also witnessed the emergence of the ￡100 million executive bonus. Despite the furore over bonuses on this scale being earned by bosses at housebuilders Persimmon and Berkeley group (many would argue achieved on the back of the governments Help to Buy scheme supporting first-time buyers), we have seen a similar scale of opportunity introduced in the 2020s for the top executives at firms including Boohoo, Wizz Air and Fraser Group.

Somewhat ironically, rent inflation (by 11.1% nationally and 17.2% in London in the year to April according to Hamptons) and now mortgage cost hikes resulting from housing shortages and interest rate rises have also been important contributors to the current poverty and cost-of-living crisis.

Similarly in explaining the screen actors and writers strike in Hollywood which is disrupting some of our Netflix and Disney streaming at the moment and spreading across other lower-paid sectors such as fast food and hotel workers, union official Kurt Petersen said ‘at the core of our strike is the question of who will be able to afford to live in this city – will those who cook and write and teach be able to afford to live in Los Angeles?’.

The same question is being asked in London and the UK’s major cities, helping to explain the rent controls introduced in Scotland.

The contribution of growing UK inequality to declining real pay in Marmot’s increasingly health- and economically- ‘divided world’ is admittedly controversial. This debate is sensitive to the data you use and the exact time periods that you measure it over, never mind your political beliefs/ affiliations.

It is also complicated by the growing level and influence of the differentially high increases which we have seen in the misnamed UK pay minimum, the National Living Wage (its not), since it was introduced by George Osbourne in 2016. This was increased most recently by a just-about-inflation-matching 9.7% in April, en route to the government’s target of raising it to 66% of the level of average earnings over the medium-term. They need to be congratulated from a fairness perspective in Rawl’s terms for maintaining adherence to this target through all of their recent political, economic and health crises. (There, i did it!).

And whether through trade union pressure or more humanitarian and philosophical concerns, or in response to continuing labour and skill shortages, IES estimate that between a third and a half of UK employers have joined with the government in the past twelve months in taking additional steps to address the real pay cuts that the majority of employees have been experiencing, which have hit their lowest paid workers the hardest. This has probably been the most common area of my own consulting work over the year.

We have seen many of the major financial and legal services firms, telecoms companies and utilities, retailers and supermarkets, and the big charities all taking action last year, far fewer unfortunately recently. Most commonly this was by making a one-off cash bonus payment, or with flat rate pay awards that have been common in the public sector and represent a higher percentage increase for lower-paid workers. Tesco CEO Kevin Murphy justified its out-of-cycle additional pay award for store staff to ￡10.30 per hour late last year by stating ‘we try to ensure colleagues don’t have to go to food banks’. But coming back to philosophy and culture, he also said it’s ‘a key part of how we see the world’.?

Its clearly not how the current government see the world. What the government’s press release on this year’s NLW increase of nearly 10% doesn’t tell you, (as well as that that average earnings target has been declining in real terms), is that a growing number of employees are paid at or within 10% of the government minimum, with some 3.5 million UK employees still paid less than a real living wage at the rate set out by the Living Wage Foundation . This is why IES emphasises the importance of regular pay progression for employees, not just paying at least the real living wage as a minimum, in addressing employer productivity and employee poverty.

According to the Joseph Rowntree Foundation over 13 million people are living in poverty in the UK, more than four million of whom are children, the majority of whom have at least one parent in work. In-work poverty, a phenomenon which the founder of the welfare state William Beveridge never envisaged as jobs were then the solution to ‘idleness’, has grown, as real wages have fallen.

While minimum wages may have been going up, the other terms and conditions for low-paid workers, as the Resolution Foundation points out, have been getting progressively worse and are poor by international standards. The UK for example, has over a million people on zero-hours contracts and a third of the UK workforce (32%, mostly in low paid work) receive less than a week’s notice for shifts, hours or work schedules. Our statutory sick pay rates are 11% of average earnings, compared with an average in the OECD of 64%, which is not great for a country when a pandemic hits, nor now for employer productivity in the post-pandemic recovery.

Unfairness and rising inequality

What is indisputable is the fact that real pay cuts and growing in-work poverty at the bottom of the UK income scale have contributed to a widening gap with the escalating real incomes and wealth of those at the top of the distribution. This was boosted by their capital gains evident throughout the 2010’s, in areas ranging from house price growth to executive share options, which are taxed at a much lower rate than income.

The High Pay Centre calculations show the median earnings of CEO’s in our largest FTSE 100 companies went up by an inflation-beating average of 12% in 2022 to ￡4.15m, which is 109 times the average pay level of their employees. This is up from a ratio of 20 times in 1970 and 50 times in 2000. As a result, we are the now the most unequal society in Europe..

So long-term real pay reductions for most, but definitely not all, of UK workers. New analysis from the Institute for Fiscal Studies based on payroll data collected by HM Revenue & Customs confirms this pandemic/post-pandemic trend towards growing inequality. UK pay growth since the start of the pandemic has been strongest for top earners in London. The IFS found that between February 2020 and May 2023 mean earnings for employees living in the capital had increased by 5% after adjusting for inflation, to ￡4,400 a month before tax.

However, these real pay gains in the capital have not been evenly shared. Pay at the median have risen only 1.7% ?in real terms since the pandemic began, to ￡2,700 a month before tax. Looking by sector, earnings in finance were 7.6% above their pre-pandemic level, and in similarly male-high-pay-dominated technology information and communication they were up 5.5%. Mean earnings in low-paid female-dominated sectors, such as hospitality and retail, and in others including education and public administration, have fallen in real terms since 2020.

So the Covid Pandemic (and ensuing economic disruption and cost-of-living crisis) have definitely not been the ‘great leveller’ of Defoe’s Journal of the Plague Year three and a half centuries earlier.

Unfairness and the persistence of pay gaps

Measuring pay gaps, from top to bottom and between different groups in your workforce, is one of the most important actions IES recommends that all employers take to assess the fairness of their pay and reward management and to help to specify where and how to act to address any inequities. So how is the UK doing on its main pay gaps? As on inequality between the high and low paid, the picture again I am afraid is not a pretty one, with persistent pay gaps adding to continuing evidence of discrimination and unfair, unequal treatment in recruitment and talent management by many employers, as well in their pay and reward practices.

‘The Gender Pay Gap Reporting Regulations have driven an important national debate on fairness at work, amplified by the unequal health and economic impact of the pandemic’ according to the then chair of the EHRC as we were all in Lockdown in 2020. The compulsory reporting regulations that were finally implemented in 2017 certainly gave a boost to government and employer actions designed to address the size of gender pay gaps that had plateaued in their gradual long-term reduction trend in the 2010s. The national all-employee median earnings gap in the ONS data came down from 20% to below 15% in 2019.

The legislation and excellent government web site with all the results has given us five years’ worth of data on these gaps covering more than 10,000 employers, helping us to better understand their nature and causes. Despite weak labour market enforcement, the level of compliance is high (probably above that of the National Living Wage) with significant numbers of smaller employers reporting voluntarily, and a growing minority of larger employers publishing similar data covering ethnicity and other disadvantaged and protected groups.

Most importantly the regulations have helped to drive employer actions to close gaps, for despite the lack of compulsion, around two-thirds of these employers by 2020 were publishing their action plans, with the best setting themselves targets for further reduction (although this proportion has fallen since reporting resumed in 2021). My old employer PwC for example , have set themselves targets for increased gender and ethnicity representation at each grade level over the next five years in their annual report.

That’s the good news. The bad is that the national gap widened once again with the government’s misjudged 18-month suspension of reporting in 2020, with around two-thirds of employers not publishing data over that period. The national gap widened once more to 17.9% in 2021 and although the resumption of reporting has refocused employer attention on addressing pay inequalities, the latest 14.9% all- employee level in the ONS’s annual analysis is still above the 2019 figure and the gap has widened in many large employers.

Look more widely at total rewards and the gap becomes a gulf. The Pension Policy Institute funded by Now in 2022 found ‘by age 65, the median women’s pension wealth is ￡69,000, while men’s is ￡206,000’.

While the government apparently enthusiastically consulted with employers in 2018/19 on extending and repeating the gender ‘trick’ with compulsory ethnicity pay reporting, which is supported by many in parliament (including the Labour and Liberal Democratic parties) and most employer, industry and trade union bodies, as well as IES and CIPD of course, the government backtracked and instead endorsed the recommendation of the review it commissioned led by Lord Sewell, a position which the Commons’ Women and Equalities Committee characterised as ‘nonsensical’. It worried about ‘adding undue burdens on business’ and is now only in favour of encouraging voluntary ethnicity reporting, publishing some not particularly helpful guidance on this earlier this year.

So the vast majority of UK employers, over 90% of those covered by the gender requirement, continue to refuse to publish their ethnicity pay and representation data. As a result we have much less understanding of the nature and causes of these cross-ethnicity gaps. The ONS in its latest annual review trumpeted that ‘The ethnicity pay gap between White and ethnic minority employees has narrowed to its smallest level’ since first measured in 2012 in England and Wales’. But it also acknowledged that breaking the data down more meaningfully between the different non-white categories, ‘most of the minority ethnic groups analysed continue to earn less than White British employees’.

The ONS notes that ‘major variations are evident by group and gender, location and birthplace’, with the overall white/BAME average pay gap being over 23% in London. Also very different sizes of the populations can present challenges even with measuring differences nationally, never mind in small and medium sized employers. But ethnicity undoubtedly impacts on employee pay levels in the UK and detailed investigations in sectors ranging from Higher Education to medicine conclude that there are unfair and unjustified pay gaps, which are generally larger than are still evident for gender.

In the NHS for example, in May 2020 the average (mean) monthly basic pay for medical staff was ￡5,995 for men and ￡5,291 for women. By ethnicity it was?highest for the White ethnic group (￡6,329 for men and ￡5,580 for women) and lowest for the Black ethnic group (￡5,041 for men and ￡4,465 for women).

Similarly the University and Colleges Employers’ Association found in its ‘Caught at the Crossroads’ research in the sector:

‘clear evidence that pay 'penalties' for ethnic minorities are significant, with Black men and Black women earning the least on average relative to White men. Our research finds overall that the pay penalty experienced by ethnic minority women in the sector is much more likely to be due to factors associated with their ethnicity than their gender’.

IES’s research work with CIPD highlights some of the causes of these gaps and we have published guidance on how to report and act on ethnicity pay gaps most effectively. Without compulsion however, the rate of progress is likely to continue to be slow.

Why have the high-flown diversity, equality and inclusion policies displayed by most of our major employers failed to highlight and address these pay gaps? This is despite the continuing financial benefits on offer to our economies and employers from replicating white male employment and pay rates amongst these other populations – estimated by McKinsey to be worth up to $28 trillion globally, and by PWC 21% of GDP in the EU? As Parliament’s Business Committee concluded, ‘the gender pay gap must be closed, not only in the interests of fairness, but in order to improve the country’s economic performance’.

Why are our DEI policy intentions failing?

IES’s research and experience in helping members to address pay gaps points to a range of factors:

·??????? A lack of prioritisation and consequent resourcing, which is perhaps understandable given the range of external ‘shocks’ that HR departments have experienced since the onset of the pandemic in 2020. ?Yet this also points to the common failure by HR, which McKinsey highlights in its call for a new ‘playbook’ of policies and actions to promote equality and fairness effectively, a failure to engage their leaders and line managers in these issues and solutions to them. A manager in a local authority told me on one project ‘we put it in the equality/diversity box’ rather than addressing it as a priority from an organisation-wide perspective.

???????? An excessive focus on ‘soft’ voluntary and developmental initiatives, particularly Unconscious Bias Training, which others have characterised as ‘’focusing on what’s easy, rather than what works’. A research summation by the EHRC certainly suggests that UBT on its own has no discernible impact on the relative pay and representation levels of women in a variety of settings, including the NHS. IES’s research highlights? a common tendency within organisations to ‘Siloism’ or a single issue and initiative focus. The causation of gaps and unfair and inequitable treatment in most employers is too complex and deep-rooted to be addressed by a single initiative or any supposed ‘quick fix’.

???????? An excessive legal and procedural focus, perhaps understandable again given the tortuous equal pay legislation and process in the UK, but often inducing in HR a failure to be proactive and act without legal pressure. In many employers there has been an excessive focus on confidentiality (through for example the use of non-discrimination agreements), and in the worst cases, even reinforcing abusive and discriminatory management and cultures. In this area, ‘HR is not your friend’ according to one former Microsoft executive.

???????? In reward management, an over-focus on formal base pay mechanisms and structures as defences against unequal pay, such as job evaluation and grading, with a consequent lack of attention to underlying cultural and process issues which often lie at the root of pay gaps. Ideas of HR business partnering for example, have often emphasised the importance of maximising line manager discretion and freedom. Yet there is good evidence that this discretion, often unwittingly, leads to white males receiving, for example, higher staring salaries, higher PRP awards and bigger bonuses.

What should you do to address unfairness?

But I am optimistic of signs of a widespread recognition in many employers and their HR departments of these traditional failings and the need to shift towards a more strategic, wider-ranging and sustained approach in order to crack their persistent pay gaps and inequities.

Presenting at an excellent meeting of Mr Richard Goff's?People Director Partnership ?in Soho recently, I was pleased to hear that pay equity and the newly ‘hot issue’ of pay transparency was so high on the priorities of many of the HR directors there, particularly those with operations in North America and continental Europe.

In the third and final part of this blog, after tracing the origin and impact of this new-found emphasis on fairness, I will conclude on Monday by summarising what IES has found ‘works’ in combatting unfair and inequitable pay levels and practices and what you should do now.

As long as i get round to finishing it!! Have a great weekend all....