Business school teaching case study: Can transparency improve pay equality?

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

An employment tribunal recently ruled that Next, the UK high street clothes chain, had discriminated unfairly against its store staff, who were mostly women, by paying them at lower rates than its mostly male warehouse workers.

The ruling, closely watched by supermarket chains and other retailers facing similar legal challenges, could cost Next £30mn in back pay.

Next argued that its pay levels reflected the market rate. Independent assessors who examined the skills, experience, and physical and emotional effort needed for the work found, however, that the functions of the two roles were equivalent. 

The case highlights the complexities of addressing gender pay disparities. Paying people differently for doing the same job has been illegal in the UK for many years. But this case potentially extends an employer’s responsibility to include how different roles are “valued”, along with which performance indicators to use.

The EU directive for pay transparency, which comes into force in 2026, will require member states to share details of employee pay for similar roles. And the criteria for evaluating roles is likely to arouse debate.

Policies that force companies to reveal employees’ salaries could lead to unintended consequences, such as rigid wage structures or outsourcing, and could mark a shift to less easily measurable forms of pay, including benefits, share options, and other non-financial remuneration.

Greater pay transparency plays a role in narrowing the disparity. Zoë Cullen, assistant professor of business administration at Harvard Business School, finds that, within an organisation, revealing pay between co-workers doing similar jobs helps limit differences but could give employees less bargaining power. Pay transparency within, and across, organisations and businesses can also help highlight available opportunities.

A recent report on the UK financial services sector from the Treasury parliamentary select committee, which scrutinises the expenditure and policy of the department, recommends advertising jobs with relevant pay bands and excluding salary history from the application process.

Expanding and diversifying the workforce is one potential way of narrowing the gender pay gap.

UK employers have had to report the gender disparity in pay since 2017. The exercise, however, remains largely one of compliance with little accountability for reducing gaps. Little academic research has been carried out on the topic, although a 2021 LSE study suggested it has led to some increase in women’s pay relative to men’s.

The UK government has signalled it will expand the principle to ethnicity pay gap reporting, despite questions about limited progress to date on the effects of gender pay gap requirements.

The UK’s Office for National Statistics defines the gender pay gap as “the difference between the median hourly earnings of men and of women, as a percentage of men’s earnings”. It can be influenced by age, occupation, education, location, industry, or whether an organisation is in the public or private sector. The UK’s slow progress in narrowing the gap as well as its lack of guidelines on what to report are mirrored internationally.

The depth of reporting varies significantly, and the requirements have little impact on corporate action and accountability. There is wide variation in commentary by the companies and how this translates into action. For instance, BT offers details of the historic trend of the gender pay gap and plots it against the ONS data. Marks and Spencer simply presents the current year data alongside the sector gap and a description of initiatives for improvement.

The Sexism in the City report from the Treasury committee highlighted that pay gap reporting has not had the impact expected, since many companies essentially hide behind industry averages.

The report recommends a significant lowering of the current threshold for companies required to report their pay gaps from 250 employees to 50. The government’s post-implementation review in 2023 highlighted that “only half of employers plan to or are taking effective action to close their gap”, yet did not outline clear recommendations for reform. The Fawcett Society, a women’s rights campaign group, recommends updating equal pay legislation. 

A broader approach would be to define corporate accounting as “a technical, social and moral practice”, which would help a shift towards fairness and equity through incorporating these details into financial statements.

Why should companies take notice?

The social and financial cases are strong. Employers that address the gender pay gap benefit from higher retention, improved engagement, enhanced productivity and innovation, academic studies suggest.

Indifference to the moral case, however unintended, is not a badge of honour. Critics would argue that only helps highlight evidence of alleged prejudice in society.