Can Tracking Employee Ethnicity Data Close the Ethnic Pay Gap?

February 24, 2022
6 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.

Racial disproportion in the boardroom

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.

Women of color underrepresented at leadership level

  • 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 women of color
  • 8 companies account for nearly 25% of the directors of color

Largest racial wage gap at management level

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 wage gap increases significantly.

Asian women, black women and hispanic women are the most underrepresented ethnic groups at leadership level and suffer the most from pay inequality earning significantly less than their male counterparts.

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 see occupational segregation with black and hispanic workers, particularly women of color, earning less than their white counterparts.

Call for mandatory ethnic pay gap reporting

Pressure put on UK Government

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.”

The responsibility of companies

As we wait to see if it racial wage gap reporting become law, we can start to look at how companies can take the responsibility of pay parity 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 the racial wage gap, it illustrates the extent of a problem and shows if the actions taken to address any wage differences 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.

D&I helping to close the racial pay gap

Deloitte has been publishing its ethnicity wage gap figures since 2017, with its latest figures showing a 14.6% mean wage 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 white counterparts. 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.

Accenture leading the way

Since 2016 when Accenture first started recording employee 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 to the labor market
  • 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 racial 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 wage gap, compared to 5% in 2018. In the US, the change may come from its highest office. US President Joe Biden signed executive actions that aim to advance racial equality and close wage gaps across different ethnic groups.

President Biden’s orders

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.

Payroll’s role in ensuring equal pay across different ethnic groups

As companies plan their HR strategy for the coming years, now is the time to start looking at how they will ensure equal pay. 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 wage 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 wage gap reporting, especially if it becomes mandatory.

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