How gender pay gap analysis informs investment decisions

In the contemporary financial landscape, DEI disclosures are not just buzzwords but offer good insight into a company’s long-term financial health. As investors increasingly consider DEI indicators within their portfolio companies, the gender pay gap, albeit an imperfect metric, serves as a starting point for evaluating gender inequality and overall workplace culture. How a company treats its own employees can be a good barometer of how it treats other key stakeholders. This concern led our investment teams to engage with several UK companies recently, all of which exhibited substantial gender pay gaps in 2022-23.

Tackling the gender pay gap

The gender pay gap measures the difference between average hourly earnings (excluding overtime) of men and women as a proportion of men’s average hourly earnings (excluding overtime). Since 2017, employers in the UK with 250 or more employees have been mandated to report their gender pay gap data. Under this requirement organisations publish the mean and median gender pay gap data alongside a narrative that explains the figures and outlines actions aimed at narrowing the gap.

At this critical juncture, it becomes imperative to make the distinction between the ‘gender pay gap’ and ‘equal pay for equal work’. The gender pay gap, is a statistical measure that highlights the difference in average earnings between men and women across an organisation. This metric serves to illuminate systemic disparities in compensation. On the other hand, the principle of equal pay for equal work mandates that men and women be compensated equally for performing the same roles as stipulated by relevant legislation.

We also relied on the gender pay analysis issued by Office of National Statistics¹ which highlighted the following main points:

• Age: There is little difference in median hourly pay for male and female full-time employees aged in their 20s and 30s, but a substantial gap emerges among full-time employees aged 40 and over.
• Occupation: The gap tends to be smaller for occupation groups where a larger proportion of employees are women.
• Industry: The pay gap is largest in the financial and insurance industry, and smallest in the accommodation and food services industry.
• Public and private sector: For full-time workers, the pay gap is slightly smaller in the public sector than the private sector. There is a negligible gender pay gap for part-time workers in the private sector, which contrasts with a large part-time pay gap in the public sector.
• Pay: Compared with lower-paid employees, the gender pay gap among higher earners is much larger.

…DEI disclosures are not just buzzwords but offer good insight into a company’s long-term financial health.

We used the above insights and individual company gender pay gap reports to engage with companies where human capital is crucial based on the nature of their business and gender pay gaps have historically been significant. However, we felt it was important to look beyond the numbers and undertake qualitative assessments.

Accordingly, our portfolio managers, along with members of the Responsible Investment & Governance Team, engaged with these companies through discussions with their HR heads or legal counsels. The companies engaged with came from a variety of sectors, including a specialist mortgage lender, a real estate services company, and an online greeting card and gifting platform. The goal was to understand the initiatives in place to enhance the recruitment, retention, and progression of women and to mitigate the gender pay gap. Questions were raised about policies supporting a flexible workplace, shared parental leave, returners programmes, mentoring, leadership development, and the setting and monitoring of internal goals as we viewed these initiatives as the key to narrowing the gender pay gap from 40 years old and onwards.

Encouraging findings

While gender pay gap reporting is aimed at promoting transparency, we do realise that it has several flaws or limitations that can impact its effectiveness. It is important to be mindful of the positives and negatives of this reporting:

Positives

Promotes Transparency: It fosters an environment of openness, encouraging companies to be more accountable for their pay practices.

Improves Employee Morale and Retention: Companies working actively to close the gender pay gap can boost employee morale, satisfaction, and loyalty, leading to improved retention rates.

Negatives

Potential for Misinterpretation: The raw data may not always account for differences in roles, experience, or hours worked, potentially leading to misinterpretation of the reasons behind pay gaps.

Risk of Negative Publicity: If a significant gender pay gap is revealed, it can lead to negative publicity and damage the company’s reputation, even if they are actively working to address the issue.

Oversimplification of Complex Issues: Gender pay gap reporting can sometimes oversimplify complex issues related to pay disparity, not fully accounting for the nuanced reasons behind pay differences, such as a lack of representation in higher paid roles.

The initial reactions from our engagements on the gender pay gap were positive, with companies expressing appreciation for investor interest in DEI. Each company showcased its dedication to becoming a more diverse and inclusive business, highlighting the specific challenges and measures adopted to improve diversity through recruitment and progression strategies.

What stood out was the unique approach each company took to address the gender pay gap, as well as the active oversight by Boards and management teams on DEI matters. Although quantifying concrete progress remains challenging, notable improvements were observed in diversity numbers, employee engagement scores, and attrition rates.

While gender pay gap reporting is aimed at promoting transparency, we do realise that it has several flaws or limitations that can impact its effectiveness.

Three innovative practices undertaken by companies

1. Leadership pledge: The leadership group has committed to three pledges focused on enhancing diversity within the company, including a requirement for each member to mentor at least one female and one underrepresented individual, aiming to foster a more inclusive environment at all organisational levels.
2. Targeted initiatives to close the gender pay gap: To address the under-representation of women in technology and senior management, the company has established external partnerships to inspire and upskill young women and non-binary individuals in STEM and launched an apprenticeship scheme to facilitate career transitions into tech roles, emphasising hands-on experience and coding training.
3. Proactive pay equity monitoring: Using an HR dashboard, the company conducts quarterly assessments of pay data, allowing for timely adjustments where necessary to address any identified pay disparities, thereby actively working towards achieving and maintaining pay equity across the organisation.

As investors, the commitment to monitoring and engaging with companies on their DEI initiatives is paramount.

The path forward

The journey towards closing the gender pay gap and enhancing DEI is ongoing. The proactive stance of these companies, coupled with their openness to share sector-specific challenges and the variety of measures undertaken, is promising. It reflects a broader industry movement towards recognising and rectifying gender disparities in the workplace.

As investors, the commitment to monitoring and engaging with companies on their DEI initiatives is paramount, even if it is only to keep the issue front-of-mind for management teams. The next rounds of gender pay gap reporting will provide further insights into the progress made and the effectiveness of the strategies employed. It is through such diligent engagement and oversight that investors can support and drive the change towards more equitable and inclusive corporate cultures.

The focus on DEI, particularly the gender pay gap, underscores a broader understanding that companies thriving on diversity and equity are better positioned for long-term success. As we move forward, the financial implications of DEI trends will likely continue to be an area of interest for investors, reaffirming the belief that an inclusive workplace is not just a moral imperative but a competitive advantage in today’s dynamic business environment. Our core belief is that companies that score well on company specific environmental, social and governance (ESG) factors and sustainability warrant a valuation premium over time.

There is no guarantee that past trends will continue, or forecasts will be realised.

Past performance does not predict future returns.