The conversation around pay and bonuses is notoriously contentious. Helen Swire asks if stronger regulations and greater transparency are bringing the UK nearer to equality across the board

pay envelope

Ever since the 2008 financial crash, executive bonuses have been the subject of countless column inches.

The public view, fuelled by headlines about failing performance being rewarded with top-level payouts, is that the executive pay picture is extremely unbalanced compared to everyone else’s earnings.

So, have we taken any steps towards equality? Certainly, since 2014 the regulations placed on awarding big bonuses – for example the European Union bonus cap, which affects the biggest financial institutions in Europe – have changed the landscape somewhat.

“I’m not aware of any controversies so far this year around financial services pay,” says Tom Hellier, head of reward at Willis Towers Watson. “So much has been put in place around regulating what financial services can and can’t do that it’s difficult for there to be a controversy without an organisation breaking the rules altogether.”

Hellier believes that big bonuses are now far more likely to be generated by genuine performance benchmarking, while transparency around bonuses has improved enough that companies are better able to articulate who they’re paying, how much, and why.

Amanda Flint, a principal in Mercer’s Talent Business, agrees: “There’s still a lot of pressure on employers’ cost bases, with increasing costs and modest growth trajectories in many cases. The days of very large bonuses have probably disappeared.

“The potential for earning large sums now lies in long-term incentive awards where executives who achieve significant value for shareholders can benefit from a large return from their share plan awards.”

There are still complexities to address, however. The Bank of England has already informed the European Banking Authority (EBA) that smaller financial institutions will not be subjected to the bonus cap, which it already opposes. The Bank is concerned that a cap will both increase fixed pay, and also make clawback more complicated.

This could be problematic, since clawback is extending, increasingly, beyond the financial sector.

“Following regulatory changes in the financial sector, there’s been a push from the institutional investor representative bodies to include malus [penalities] and clawback provisions in long-term incentive arrangements for executives, and we’re also seeing it among some of the smaller companies,” says Caroline Harwood, director of incentives at Burges Salmon. “But there’s a lack of practical experience. Some very large companies are putting clawback provisions in place but without thinking about the tax implications.”

In bonus payouts then, it looks like the ‘increased transparency’ box can be ticked, but not yet the ‘decreased complexity’ box.

The smaller picture

Of course, while the intricacies of bonus payments are knotty for big business, smaller companies have a different problem.

The recession has left many small and medium-sized companies unable to afford pay rises, or bonuses in any form. The 2016 Budget announcement lauded a “stronger, growing and resilient” economy – but companies have, nonetheless, had nearly a decade of accommodating cuts and significant changes to benefits.

For many, this has encouraged a rethink of the benefits package, to ensure that employees are receiving some form of reward: whether that is financial in terms of salary sacrifice, share schemes or discounts and savings, or looking after other elements of their lifestyles.

“Companies not being able to afford bonuses has driven a different approach to employee benefits,” says Harwood. “For example, there’s a lot more focus in flexibility on culture, good management techniques, and health and fitness benefits.”

Of course pay is still a key differentiator – but employers are swiftly realising there’s more they can do.

Hellier says: “Research around what retains people and motivates them to go the extra mile shows that there’s a wide range of things for employers to consider.

“Pay is there – but beyond pay you’ve got elements such as engagement with the employer, belief in company vision and values, how much they can look up to leadership and so on. There’s a lot more organisations can do to support their staff beyond just the pay question.”

Nonetheless, employers of all sizes have a new pay question to consider – from April, all employees over the age of 25 have been legally entitled to the new National Living Wage of £7.20 per hour. Some employers will hold to the letter of the law in implementing this, but others may wish to roll it out to all staff, regardless of age.

Naturally there is a reluctance to criticise this new wage – who would want to be seen to stand up against helping those on the lowest wages?

But while it is fundamentally a good move for employees, there are concerns about the pressure it will put on companies in terms of recruitment and benefits offerings. Could it be that the benefits that have made up for the lack of bonuses will be squeezed out in favour of a slightly higher pay package?

“Of course we’re for the living wage – it’s a great idea – but at the moment there’s a whole raft of things that are having a profound impact on small employers,” says Ian Cass, managing director of the Forum of Private Business. “The staging date of auto-enrolment is just hitting the smaller firms now, and there is also a huge number of costs attached to employing people.”

For Cass, it is no surprise that the Forum of Private Business reports an increase both in the number of freelancers and consultants, and also helpline calls about redundancy practices and procedures.

Many organisations may be able to absorb the costs of this year’s increase to £7.20 – but the rate is set to go up to £9 by 2020, and as yet the uncertainty about the rate of increase continues.

Hellier says: “Big retailers have said that they’re looking at a fixed-cost increase of £25m. The only way the National Living Wage won’t affect the bottom line is if there are cost reductions elsewhere, or if the costs are passed on to consumers – which is unlikely to happen in a competitive environment.”

He raises concerns that the magnitude of the increase will affect enough employees that a broader review of pay and benefits, including things like bonuses or weekend pay, won’t be enough: instead, Hellier agrees with Cass’s view that reduced staffing or restructuring of employee models might be the answer for businesses.

But is there an answer that would help meet legal requirements and avoid lay-offs and benefit losses? Not all boxes can be ticked, but Harwood believes that salary sacrifice benefits can go some way to helping in these circumstances.

“If you take the average worker, there are people in every family that would benefit from salary sacrifice arrangements. Modelling your job around your own personal circumstances continues to be an extremely attractive benefit for individuals,” she says.

“If employers can divert some of the cash from the higher to the lower paid, for example by using share schemes or salary sacrifice rather than through a pay rise, they can use those funds to meet the demands of the National Living Wage, as well as giving employees what they want.”

However, there remains a continuing question mark. The Budget clarified that salary sacrifice benefits relating to healthcare or childcare will remain tax efficient, but the government has not yet confirmed which other benefits, if any, will be able to be offered in this way.

If this is the answer to offering decent benefits and paying the National Living Wage, it is imperative that employees understand all the tax regulations.

Equality for all

You could be forgiven for thinking that the UK is nearly there with pay equality, but other issues still need to be addressed.

For one, zero hours contracts are still a contentious issue: although they work for many people, there is still evidence of abuse by some employers.

While many organisations are using these contracts correctly and effectively, employees on these terms will not necessarily have rights to the National Living Wage, nor will they be auto-enrolled into a pension.

And shockingly for 2016, there is still the issue of the gender pay gap.

The government has announced that all firms with more than 250 employees will have to publish their gender pay gap in 2018 – two years later than the original date published in the consultation.

Fiona Hathorn, the managing director of Women on Boards UK, believes that this delay is down to the size of the task at hand. “Firms need time. Many have produced their gender pay gap data,” she says, “but they’ve yet to look at it and understand it properly. Most of the smaller firms are looking at it for the first time and have no idea how to interpret the data.”

Companies such as PwC and Deloitte are clear examples of best practice in monitoring their pay gap, and have been doing so for a long time: the former reports a gap of 2.8% within grade, the latter, 1.5%. But for many employers, reporting the data according to pay grade is a new concept, leaving them with sheets of incomprehensible figures to compare.

“It’s a complex area: the government needs to balance its objectives to encourage action with the potential of creating significant legal risk for organisations if they don’t act,” says Annelise Tracy Philips, senior employment lawyer at law firm Burges Salmon. “The larger the organisation and the more diverse the portfolio of staff or activities, the more difficult it is to actually gather the data required.”

Women on Boards has pushed the Australian model for gender pay gap transparency. In 2011, the Australian government set up a complete department with funding behind it, and created a document showing employers how to produce and collate the gender pay gap information. It also launched a website and app, so organisations can compare and contrast their employee base with other companies of their size and in their sector.

“We need that same infrastructure and investment to get this right,” says Hathorn. “I’d like to see a website set up where all the data is going to be reported centrally and transparently.”

Will this reporting be effective? Hathorn and Brenda Trenowden, head of financial institutions, Europe, ANZ, and global chair of the 30% Club, both say: “What gets measured gets managed.”

“This would take a significant step in addressing the balance in the talent pipeline,” Trenowden adds. “Insisting on the publication of data will serve to drive further action and catalyse progress towards resolving the imbalance.”

Despite the delays and potential complexities surrounding the publication of companies’ gender pay gaps, in general the reaction towards it suggests it will be a catalyst in the move towards workplace gender equality, and also the wider discussion on pay equality.

“The transparency, and the potential of employee unhappiness and brand risk is likely to drive this further up the corporate agenda: and the further up the agenda it gets, the more likely it is that there will be opportunities to act,” says Burges Salmon’s Philips. “Part of the issue is that organisations don’t know where their female under-representation is, or what the blockers to their progression are. If you have the information, then you can start to address those issues.”

Chancellor of the exchequer George Osborne, said in his Budget 2016 statement: “The gender pay gap has never been smaller.” In 2016, this hardly seems like something to shout about – but the reality is that the UK is moving in a positive direction, albeit slowly.

Transparency around executive bonuses, continued salary sacrifice benefits, a National Living Wage and gender pay gap reporting: all, in theory, positive steps towards a more balanced workforce.

What employers must now do is ensure they know the regulations around each, and use the benefits to their maximum impact, to create a fair workforce that gets the most out of each pay cheque.