Why ethnicity pay gap reporting may not give a true picture of diversity

31 Jan 2019 By Tom Heys

As Tom Heys explains, the inherent variability of organisations’ workforces could mean that transparency reporting might not be as transparent as we think

In the past few years, we have seen a raft of new transparency measures aimed at employers which are being used as a method of driving change. First we saw the ‘naming and shaming’ of those who failed to pay the national minimum wage (NMW). Then came modern slavery statements. Gender pay gap reporting followed soon after and last year a new requirement was imposed on listed companies to publish their CEO pay ratios. 

It is easy to see why imposing transparency requirements can appeal to lawmakers. As a means of encouraging good behaviour among employers, transparency is arguably highly efficient. 

If businesses that do bad things are forced to tell everyone, it means they will probably make more of an effort to stop doing those bad things. This is what we’ve seen with gender pay gap reporting. It’s caused employers to really think about the issues that women face in the workplace and take measures to try to resolve them.

Buoyed by the impact of gender pay gap reporting, the government has another proposal: ethnicity pay reporting – a consultation for which closed on 11 January.

The consultation sought comments on a number of possible ways in which employers could be required to report, including having a single pay gap figure of ‘white vs non-white’; multiple pay gap figures for all the different ethnicities; or publication of pay information by pay band or quartile (this is the approach suggested by Baroness McGregor-Smith – her 2017 report Race in the Workplace is referenced in the consultation).

The consultation also asked whether it would be helpful to mirror the requirements of the gender pay gap reporting regime: for example with the same definitions of ‘pay’, ‘bonus’ and ‘relevant employee’, and the same six reportable statistics. There are considerable problems with this mirroring approach in calculating pay gaps.

Pay gaps are calculated by comparing the average (either mean or median) of one group to another. But the size of those two groups might not be similar and some workplaces can be heavily gender skewed – for example, 90 per cent men. In a company of 300, this would mean that the average hourly rate for men is calculated from 270 people, but the hourly rate for women is calculated from just 30 people. The hiring (or firing) of just one or two women can therefore have a big impact on the hourly rate, and consequently the overall reportable gap.

Ethnic minorities are exactly that – minorities – so most large employers are likely to have a smaller proportion of non-white employees. While for some employers this might be due to discriminatory practices, it won’t be for most. If ethnicity pay reporting were to mirror gender pay gap reporting, then we would see the ‘small groups’ problem reoccur often, especially if multiple pay gap figures were required for multiple ethnicities. 

This means that ethnicity pay gap figures will be likely to vary massively from year to year. And this usually won’t be due to any new initiative adopted, but simply because of the laws of chance. 

The trend for transparency will continue in the year to come and we should expect to see more reporting requirements imposed on employers. But these transparency requirements are only effective if the information published can be relied on. Information with a large amount of inherent (but unstated) variability is not helpful. 

The government may be thinking that gender pay gap reporting has been something of a success and be keen to take the quick route to legislate on ethnicity reporting. But let’s hope it really listens to the responses provided by the consultation and engages with the issues first. 

Tom Heys is a legal analyst at Lewis Silkin

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