UK retailers’ approach to pay transparency is under the spotlight

In 2023, Birmingham City Council effectively declared itself bankrupt following a dispute over equal pay that left it with an outstanding liability of £750 million^[1]. Birmingham is not alone either, with many other councils also facing similar equal pay claims that, taken together, could run into payouts worth billions of pounds. But if the retail sector thought this was just a local government problem, the news that several major retailers including some of the UK’s biggest supermarkets are also currently embroiled in equal pay claims – with a combined potential payout of up to £8 billion^[2] – should have dispelled any complacency surrounding this growing risk. 

It is why, given this potential legal liability for equal pay claims, together with the increased focus on diversity, equity and inclusion from existing and future talent, and the introduction of new laws such as the EU’s Pay Transparency Directive, retailers need to assess their overall approach to pay transparency. The good news is, embracing pay transparency can yield enormous benefits to firms as a way of building trust, engagement, productivity and for improving talent retention and attraction. But conversely, getting it wrong can have hugely negative effects including financial loss and reputational damage.

Demystifying Pay Transparency

The term ‘pay transparency’ can have different meanings for different stakeholders. For employers, it could mean explaining how pay is determined. For others, including employees, it could go as far as full transparency around the salary paid for every role within an organisation; that means openly sharing information about compensation with every employee and every job candidate.

From a regulatory perspective, pay transparency has become synonymous with the new EU Pay Transparency Directive, which is fundamentally focused on ensuring equal pay for equal work or work of equal value. The Pay Transparency Directive will require companies to publish information on the pay gap between female and male workers and, where a gender pay gap of five percent or more exists, develop a corrective action plan. Furthermore, job applicants will have the right to receive information on the initial pay range for any advertised position and employers cannot ask candidates about previous or current pay.

Not only will the Pay Transparency Directive affect many UK firms with operations in the EU, it is expected that the UK will adopt similar rules – nearly nine out of ten (87 percent) of senior HR leaders surveyed by Aon in the UK and EU in 2023 said they believed the EU directive would impact UK companies.^[3] The UK government has already announced a pilot program to encourage companies to disclose salaries for all job openings to help encourage more transparency and close the gender pay gap. In 2023, the government also said any pay transparency rules, including the pilot program, will be under consideration by a new Inclusion at Work Panel “to help employers drive fairness across organisations”^[4].

Business Complacency?

Despite these regulatory changes and the increasing number of legal cases focused on equal pay, pay transparency is not yet the boardroom issue it should be. In practical terms, only 21 percent of more than 250 companies surveyed reported having a pay transparency plan in place, according to Aon’s August 2023 Pay Transparency Readiness survey.

For retailers, this disconnect between senior management and pay transparency should be taken particularly seriously given their exposure to a younger workforce which expects greater openness when it comes to discussing and sharing salary details. Add in the high percentage of women in the workforce, and ongoing pay pressure from unions then any changes to pay as a result of the impact from equal pay cases could have a disproportionate effect on the industry.

A Three-Way Approach to Achieving Pay Transparency

How then should retailers approach pay transparency? First, reviewing and revising job architecture to organise jobs, levels, and titles lays the foundation for salary structures. Get it right and it provides employees with a more transparent career path, as well as investors and regulators with a level of assurance that demonstrates commitment to diversity, inclusion and equity across the organisation.

Secondly, having access to the right data should be every organisation’s priority in terms of both understanding competitors’ pay but also a pay equity analysis within the organisation to identify why gaps exist and making sure any unexplained gaps are closed. If a business does not have those figures, it is effectively operating in the dark when it comes to dealing with pay transparency issues.

Thirdly, getting the communication strategy right for all stakeholders is a must. Having an open and honest approach to potential recruits around salary rates, for example, sets the expectation for a company’s position on pay transparency. Being more open around salary bands for existing employees is also key, even though it’s often contrary to the way that businesses have behaved historically and culturally. Enabling data led conversations between managers and their direct reports around pay should be a priority.

Pay Transparency Can Build – or Destroy – a Reputation

Those retailers who proactively approach pay transparency can look forward to not just avoiding potential regulatory fines or penalties, but also burnishing their ESG and DE&I credentials with not only existing and prospective employees – a vital plus in the current war for talent – but other stakeholders such as investors and customers who increasingly demand that the businesses they deal with have a positive story to tell on pay. 

For more information contact giles.patterson@aon.com and sabiha.vorajee@aon.co.uk

^[1] https://www.ft.com/content/c390054d-9618-4695-b210-53d9000a8242

^[2] https://www.bloomberg.com/news/articles/2021-03-26/asda-loses-top-court-ruling-paving-path-to-equal-pay-for-women?leadSource=uverify%20wall

^[3] https://www.aon.com/en/insights/articles/how-companies-are-approaching-the-pay-transparency-movement

^[4] https://www.gov.uk/government/publications/inclusive-britain-update-report/inclusive-britain-update-report