With the 2020 reporting season just around the corner, one aspect of corporate governance that continues to rear its head is remuneration. Not just executive remuneration either, the new code asks remuneration committees to check organizations are living up to their equal pay policies on other characteristics too, like diversity, ethnicity, age and more. It’s never been more essential for company CFOs to take the lead in identifying risks within their organization — especially when it comes to equality.
The Financial Reporting Council (FRC), the regulator accountable for the creation of the United Kingdom’s corporate governance code, recently took aim at several large listed companies for complying with governance rules for compliance’s sake, rather than achieving anything valuable.
Given mounting pressure from the FRC’s new rules, remuneration committees, or REMCOs, now demand data extending beyond the typical CEO pay ratios. Data on remuneration now stretches into the broader organization — covering all employees across a broad section of inequalities, inclusive of gender and ethnicity. It also encompasses all components of reward, not just compensation. Remco’s are now requesting additional data on performance reviews, work experience, pay ranges within grades, and job descriptions, together with other aspects that create vulnerabilities that have led to equal pay compensation awards amounting to hundreds of millions.
The risk reporting role
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 CFOs incorporate FRC’s requirements into a workable governance system. The role of the CFO demands that these requirements are met with the utmost transparency.
And this is not just a compliance issue. It impacts return on investment. A report by EY recently found that a CFO exerting a higher level of engagement in workforce strategy resulted in better business performance overall. And this makes sense. From a strategic perspective, the CFO is liable for molding company direction — enhancing business performance and shareholder value. Shareholders and investors depend on the efficacy of a business’s corporate reporting. With equal pay becoming a rising tide risk, finance chiefs need to feel confident that companies have reliable data beneath their top-level reporting.
Given the wide range of unconnected systems that administrate reward (payroll, benefits, pensions, shares) CFOs may find that collating this data so that the total reward position for every employee can be compared leads to a host of problems. Ideally, an analytics platform that incorporates both financial and employee-centric data from across the entire organization offers the best solution for CFOs. It’s only through this kind of a reporting system, with full access to company information, that CFOs will be able to monitor risks effectively and in real-time.
Learning from the past
Failing to account for these conditions can land businesses in hot water and engender painful reputational damage. You only need to look at the fallout from the inequality accusations within the BBC to realize the need for caution. The broadcaster was infamously caught out in 2017, after publishing a list which proved a distinct gender pay gap. In the years since, the BBC has fought (and lost) multiple equal pay tribunals, paying out a vast amount in reparations. However, it’s fair to say that thanks to national media coverage, the BBC suffered more in reputational damage than it has paid in compensation. And from what we can see, apart from its high-profile earners, the BBC is one of the better equal pay organizations.
The BBC isn’t the only employer to face equal pay claims. Several organizations in Britain have multi-claimant equal pay cases yet to be determined. Retailers are facing bills that amount to billions. These claims could have been avoided via the use of data to identify misalignments and inconsistencies across pay grades, employee demographics, and more.
Organizations need to do two things. Firstly, they need to be far more assertive in applying equality and diversity policies to reward. Secondly, they need access to the data, via a dedicated, real-time, platform that can show and analyze the total reward for every employee in the business. Retail giants Asda and Tesco already understand this. Both are facing billion-dollar claims following allegations of gender discrimination.
Rather than a way to avoid lawsuits and reputational damage, organizations should use the FRC rules to reconstruct their business strategy and appeal to a broader demographic of expertise. In doing so, businesses not only tick the compliance boxes but they stand out from the competition as a genuinely diverse, forward-thinking business and if you believe that talent is normally distributed across all groups, they increase their chance of getting the best people to the most important jobs.
In a climate where employees are more switched on about gender pay disparity and equal pay, organizations must start to understand the risks; otherwise, don’t be surprised to see more equal pay issues arising the next few years. To stay on the right side of REMCOs, companies must start preparing the remuneration data necessary to find, explain, or eliminate pay gaps.
In the end, heightened scrutiny over equal pay, be it gender, ethnicity, or otherwise, is not going away any time soon. CFOs need to be adequately equipped to handle this developing issue before reputational risks arise.
About The Author
Ken Charman is CEO ofuFlexReward, a consolidated HR and rewards data platform.