Can Tracking Employee Ethnicity Data Close the Ethnic Pay Gap?

March 23, 2021
5 mins read
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Events in 2020 pushed the conversation around race and ethnicity to the forefront with unprecedented force. While there were many calls to action, one that resonated with many was the call for greater representation in senior management. Disappointed with the pace of change, one group, Change the Race: Ratio, has set targets for greater racial and ethnic diversity at executive levels and argues that the lack of ethnic diversity in business costs the UK £24bn a year in lost GDP. Its founding members include Deloitte, Microsoft, and Unilever, and they actively seek other signatories, companies who are willing to commit to making a difference in diversity in business leadership.

Targets that are clearly needed given the dearth of diversity at the board level. In the 2020 Parker report on ethnic diversity, they found that although there are many more women in the boardroom, it remains a predominantly white domain.

  • 172 or 7.5% of all FTSE 350 directors – where ethnicity is known- were people of color (POC)
  • 98 or 9.7% of FTSE 100 – where ethnicity is known- were POC
  • 80 or 5% of FTSE- where ethnicity is known- were POC
  • Across the FTSE 350, only 15 directors of color occupy positions of Chair or CEO
  • FTSE 350- 43% were held by females of color
  • 8 companies account for nearly 25% of the directors of color

Apart from the obvious drawbacks of having no diversity in leadership, there is also the issue of pay inequity. Looking at US data, we see that although when we look at the roles individuals play, the mix is relatively even, yet when you look at management levels, the picture changes significantly.

Source: PayScale

As individual employees move and progress in their careers, their pay typically increases. However, when the upward trajectory is specific rather than applying to everyone, what ends up happening is that we have groups in our society who are always in a less favorable financial position.

Call for mandatory ethnic pay gap reporting

In 2020, taking their cue from the gender pay gap reporting legislation, 100,000+ UK citizens signed a petition calling on the UK government to introduce mandatory ethnicity pay gap reporting. The petition’s author, Rabya Aftab Lomas, believes that expanding the gender pay gap reporting obligation is necessary given the “lack of data available in gauging the ethnicity pay gap in the workplace. Introducing these measures will allow employers to be held accountable in closing the gap where there is a disparity.”

As we wait to see if it does become law, we can start to look at how companies can take this responsibility on themselves. And here, the picture is quite mixed. Only 3.2% of Fortune 500 companies release race and gender data. While in the US, just 4% of all public companies reveal the racial makeup of their employee base.

Do reporting and transparency work?

While data alone does not solve a problem, it illustrates the extent of a problem and shows if the actions taken to address any issues are working. Diversity & Inclusion (D&I) experts recommend carrying out a diversity audit and ethnicity pay gap audit before launching any D&I initiatives. Deloitte has been publishing its ethnicity pay gap figures since 2017, with its latest figures showing a 14.6% mean gap. Lloyds Banking Group has become the first major UK bank to disclose its black pay gap, which showed that its black staff is being paid almost 20% less than their colleagues. The bonus pay gap was even greater, standing at 37.6%. Lloyds assert that this because only a very small number of black staff hold senior positions (0.6%), and the bank has pledged to increase this number to 3% by 2024.

Since 2016 when Accenture first started recording the data and annually releasing the demographics of its U.S. workforce by gender, ethnicity, and race, persons with disabilities and veterans, they have

  • Added more than 20,000 people of diverse backgrounds
  • Increased representation of African American and Black people 0.6% among executives and 1.8% overall
  • Increased the number of Hispanic American and Latinx people 1.3% among executives and 2.9% overall
  • Increased the number of Asian American and Asian executives by 3.6 %.

Challenges to reporting ethnicity pay gap

Historically, the lack of data about the ethnic makeup of an organization’s workforce was given as the main reason why some companies were not yet calculating their ethnicity pay gap. The reason for this dearth of information includes GDPR restrictions, low response rates,  a lack of capability within HR systems, and unease about how to ask questions about race and ethnicity. However, that is now changing. 23% of businesses are now calculating their ethnicity pay gap, compared to 5% in 2018. In the US, the change may come from its highest office. US President Joe Biden recently signed executive actions that aim to advance racial equality. Included amongst these orders are measures to

  • Require all federal agencies to review equity within their ranks and deliver an action plan within 200 days to address unequal barriers to an opportunity found within agency policies and programs.
  • Revoke former President Donald Trump’s executive order that limited the ability of federal government agencies, contractors, and some grantees from implementing some diversity and inclusion training.
  • Study new methods that federal agencies can use to assess whether proposed policies advance equity.

As companies plan their HR strategy for the coming years, now is the time to start looking at how they will ensure they pay all their employees equally. Payroll has a part to play in this objective, and while some countries like Singapore already require an employee’s ethnicity to complete payroll, many others do not. As we wait to see if the law changes around this, remembering that in 2017 the UK introduced mandatory gender pay gap reporting for companies with a headcount of 250 or more, so it may happen sooner rather than later. It is also time to consider if having your payroll integrated with your HCM will help facilitate ethnic pay gap reporting, especially if it becomes mandatory.

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