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INSIGHT: How the Push for Greater Compensation Reporting Requirements Could Put Global Companies at Risk

Aug. 15, 2018, 12:01 PM

The recent string of headlines about pay gaps has many companies on edge as they adapt to a world of increased compensation reporting requirements.

The UK became the latest country to institute compensation reporting requirements when it released the results of its gender pay gap study in April. Predictably, the results showed that women are consistently paid less than men—on average by 9.8%—with particularly wide gender pay gaps in the construction, finance and insurance industries.

This data point adds to a growing body of research that shows two common pay gaps in countries and companies around the world—one between men and women, and one between corporate executives and average employees.

In an attempt to close these gaps, many countries, particularly in Europe, are now requiring large and mid-sized companies to disclose the differences in how they compensate employees. The theory behind these regulatory and legislative moves is that increased transparency on what companies are doing—or not doing—will ultimately lead to more equitable pay. However, encouraging is still a long step away from enforcing.

Thus far, relatively few governments or regulatory agencies have implemented specific punishments for companies that fail to make progress towards closing their pay gap or that fail to report entirely. But this doesn’t mean that companies, particularly those with large international workforces, have nothing to fear.

There are, in fact, a number of risks that companies should be aware of, and understanding these risks may hold the key to thriving in an increasingly competitive and transparent business environment.

Reputational risk

The media has not been shy about covering pay gaps, whether talking about the unfair labor practices in a country, in an industry or even at a specific company. No company wants to find itself at the center of a journalistic investigation, and even a few days of bad press can do substantial damage to a company’s stock price and its ability to attract talented employees.

There has also been some speculation that countries would begin publishing league tables with a complete list of the best and worst performers across various industries. While this sort of gamesmanship is far from a scientific approach to dealing with the problem, it is effective. Already, several media outlets have put together their own mini-rankings and published high-profile exposes critical of specific companies or industries. Here is just a sampling of headlines in recent weeks about the UK gender pay gap study:

  • “Gender pay gap: how women are short-changed in the UK”
  • “Britain Aims to Close Gender Pay Gap with Transparency and Shame”
  • “Major Fashion Names Among Worst Offenders in Britain Gender Pay Gap”
  • “Science’s vast gender pay gap revealed in UK wage data”
  • “Gender pay gap widens in UK PR sector”

Companies caught in the crosshairs of one of these stories face a potential onslaught of prying questions from employees, industry trade bodies, politicians and other media. Since in many cases the compensation data is public, companies are limited in how they can defend themselves, leaving them susceptible to continued government and public scrutiny until improvements are made.

Business risk

Businesses concerned about the new and evolving compensation reporting requirements likely don’t want to be subjected to a large fine that would hurt the company’s bottom line. Thus far, governments and regulatory agencies have been fairly slow to enact specific punishments for companies that don’t comply with compensation reporting requirements or companies that don’t improve their pay gaps year over year. The hope among policymakers is that competitive pressures to be seen as best-in-class (or at least not bottom-of-class) will motivate change more than regulatory fines or penalties will.

The UK’s program offers a useful case study. Technically, there are no current penalties for qualifying companies that fail to report, or companies that report but with suspect numbers. However, failure to comply with a government-mandated obligation still constitutes an unlawful act, which empowers the Equality and Human Rights Commission (EHRC) to take enforcement action such as investigating the company in question and/or issuing an unlawful act notice. Non-compliance is therefore technically unlawful but, with limited resources, the EHRC will only be able to take a passive role with regard to enforcement.

This passive approach—one favored by several other countries including the U.S.—is of course subject to change, and will likely continue to be a talking point during upcoming elections. A change in government leadership could pave the way for a change in policy, and companies that ignore this eventuality put themselves at increasing amounts of business risk.

Litigation risk

Many businesses are also understandably concerned that disclosing a large pay gap, or refusing to disclose any data at all, will make them susceptible to litigation in the form of class-action lawsuits. For example, a group of senior female executives could unite in demanding more equal pay with their male counterparts. However, these cases are typically built on a weak footing. A gender pay gap does not necessarily equate to a lack of pay parity. The plaintiffs would have to prove beyond a reasonable doubt that they were discriminated against because of their gender, rather than because of a disparity in performance. For this reason, we may be unlikely to see many lawsuits reach the court system until the laws are changed to institute more specific punishments.

Shareholder risk

This raises another potential risk—shareholder pressure. Shareholders of public and sometimes even private companies want to know that the companies they are invested in are paying employees fairly. This focus on equal pay is just part of a larger trend on increased reporting on environmental, social and governance (ESG) issues.

According to the 2016 Global Sustainable Investment Alliance (GSIA) Review, in early 2016 there were approximately $23 trillion in assets managed under a responsible investment or ESG strategy, up more than 25% since 2014. These numbers are only expected to continue to grow, with a growing body of research from firms like McKinsey and educational institutions like Oxford University showing a direct link between greater financial performance and companies that perform well on a range of ESG factors. Going forward, shareholders may not be as shy about demanding compensation changes due to gender or executive pay gaps.

We are still in the early days of mandated corporate disclosures around things like gender pay gaps and CEO pay ratios. With multiple countries now taking a stand and pushing for equitable pay, governments are sending a clear signal to companies that those who ignore this trend and fail to improve their pay gaps will have a hard time surviving in today’s increasingly competitive business environment.

Author Information

Brian Jebb is a partner and head of the U.S. Employment & Benefits practice, and Sarah Henchoz is a partner in the London office, at Allen & Overy. They both specialize in issues that affect global employers.

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