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Don’t bury your head in the sand over pay transparency

Author: ICAEW Insights

Published: 18 Oct 2023

The recent financial crisis faced by Birmingham City Council, the administrative body of the UK’s second-largest city, has sparked important discussions about equal pay, financial management and organisational responsibility.

Birmingham’s financial crisis was triggered by a series of equal pay claims, which have already led to payouts of more than £1.1bn in the last 10 years, with an additional liability of £760m still outstanding. This raises questions as to why the council did not take action a decade ago when they realised how costly their lack of pay equality was becoming.

Implications of non-compliance

The UK Equality Act 2010 states that men and women in the same employment are entitled to equal pay for like work, work rated as equivalent, and work of equal value. This applies to all the protected characteristics. Instances where men and women are doing equal work can be determined by the definitions outlined in the Equality Act:

  • Like work: colleagues with the same or ‘broadly similar’ roles involving comparable tasks, knowledge and skills.
  • Work rated as equivalent: jobs within the same grade/level as defined by a job evaluation framework.
  • Work of equal value: deemed equal in terms of the demands of the role including skills, training and responsibilities.

The financial implications of non-compliance can be severe. In Birmingham’s case, the council has been forced to issue a section 114 notice, effectively declaring bankruptcy. In addition to the direct financial impact, there are also indirect costs in the form of reputational damage and loss of trust, which can affect an organisation’s ability to attract and retain talent.

Pay conversations

Employees (particularly Generation Z) are increasingly talking about pay in the workplace. They have free access to platforms such as Glassdoor and Indeed that show them exactly how their salary compares to similar roles across different organisations and industries. Instead of pretending these conversations are not happening, it is the job of leaders to promote pay transparency and address employee concerns in an honest and timely manner. 

But many organisations are still hesitant to embrace pay transparency, often because of fears of competition or employee discontent. However, it is a critical element in ensuring pay equality. It involves openly communicating about how pay decisions are made, which can help to build trust and prevent misunderstandings. 

The role of HR

Human resources (HR) plays a crucial role in promoting pay transparency. Regular equal pay reviews can help to identify and address any disparities, while clear and consistent policies can prevent unequal pay from arising in the first place. Moreover, HR can facilitate open dialogue about pay, helping to foster a culture of trust. When pay decisions are kept in the dark, employee performance takes a nosedive and job satisfaction goes out the window. 

In this day and age, most employees care more about being treated fairly in relation to their colleagues than about the actual levels of pay. In fact, research from human capital advisory company Josh Bersin found that well-communicated pay equity is 13 times more important than high levels of pay in retaining employees.

When we see from Oxford Economics research that the average cost of replacing a single employee is more than £30,000, it demonstrates the benefits of proactivity and avoiding ongoing costs.

Ongoing challenges and costs

A huge cause of inequality in organisations comes from hiring candidates on a much higher salary than the current internal pay ranges. Recruitment teams and hiring managers do not necessarily think about the long-term pay discrepancies created when they offer whatever it takes to replace an employee quickly. Their main concerns are the immediate challenges – such as bringing in someone new to fill a role to meet their short-term targets.

However, lack of pay progression is a common reason for this issue arising in the first place. If you are not progressing pay for current employees, they begin to realise that they’re going to get much higher salaries and better progression opportunities elsewhere. 

Not only that, but you’re losing high performers with good knowledge of your organisation – you’ve spent a lot of time and money on these individuals to mentor and train them. It’s a mistake to continue to rely on investing in constant recruitment. Instead, you should reallocate some of the budget towards pay progression for your loyal employees. By doing so, organisations can avoid the ongoing challenges and costs that will inevitably arise in the form of recruitment fees and talent replacement, as well as the legal costs that come from dealing with discrepancies and equal pay claims.

Learning from Birmingham’s crisis

The Birmingham City Council case offers important lessons for other organisations. It underscores the importance of addressing equal pay issues proactively, rather than burying one’s head in the sand. 

To prevent a similar crisis, organisations must prioritise pay equality and transparency. This can be done by:

  • conducting regular pay audits;
  • establishing clear pay structures and policies;
  • providing equal opportunities for progression, training and development;
  • having open and honest conversations with employees; and
  • investing in employee communications.

Remember, equal pay for equal work doesn’t mean everyone has to get paid the same amount. But if differences do exist, you must be able to explain and justify them. The level of transparency can vary between organisations, but the overall goal is to build a culture of trust and reassure employees that they are being treated equitably. 

With trust comes loyalty. And, more often than not, the cost-free approach of good communication and treating employees like adults is going to help you retain employees and manage costs far more effectively than keeping everything the way it is and dealing with the fallout later.

Rameez Kaleem, founder and managing director at 3R Strategy, and author of A Case of the Mondays.

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