Your pay system is the basis on which you reward employees for their contribution to your organisation. ‘Reward’ means not only pay itself, but all contractual terms of employment, such as bonuses, holiday entitlement, company cars, pensions contributions and any other benefits.
Achieving and maintaining equal pay requires a fair and transparent pay system. Although pay systems will vary from employer to employer, there are some common areas of risk.
Checking and, if necessary, addressing these risk ‘hotspots’ in your pay system is an important step towards achieving equal pay and reducing the risk of an equal pay claim.
Transparency in your pay system means that everyone (managers, employees and, if relevant, trade unions) should understand the pay and benefits system for all employees.
In particular, employees should be able to understand how each element of their pay packet contributes to their total earnings in any pay period.
A transparent pay system avoids uncertainty and perceptions of unfairness, reducing the risk of an equal pay claim.
The simpler your pay system is, the easier it will be to understand and administer – and the more likely it is to be both transparent and objective. If you have different systems for staff above a certain grade, or one for production workers and another for administrators, not only will it be more complicated and more expensive to manage, it reduces transparency and increases the risk of unequal pay.
The best way to eliminate unlawful pay gaps is to base your pay system on a robust analytical job evaluation that covers all employees. Use analytical job evaluation to assess job demands and structure your pay system around this evaluation. Be aware that the demands placed on different jobs may change over time, so make sure you re-evaluate regularly.
This means analysing the expected outcomes of the proposed changes to your pay system to check whether they would have a negative impact on one sex (as well as employees sharing other protected characteristics).
The equality impact assessment should include:
- comparing pay data from the current and proposed new pay structures to check the impact of the proposals on women and men.
- reviewing proposed changes to grading, pay structures and other terms and conditions to identify any gender-related differences, and
- deciding whether any detrimental impact on female or male employees is justified, and if it isn’t, amending the proposals accordingly.
If your organisation is a public body in Wales or Scotland, an equality impact assessment of your policies and practices is likely to be a legal requirement. If you’re a public body in England or your organisation is in the private sector, an equality impact assessment, or equality analysis is an effective way to assess the risk of the proposed changes.
The term ‘starting’ pay covers the amount someone is paid when:
- they join the organisation
- their job changes significantly and its grading is reviewed, or
- they are promoted to a new job or grade.
You need to establish a clear policy on starting salaries and make sure this is followed consistently.
For example, it is good practice for new appointees to a post or grade (whether new recruits to the organisation or internal promotions) to start at the minimum point of the relevant pay scale or range, unless they meet the criteria for a higher point on the scale.
Be clear about the skills and knowledge a new starter must have to get the job, and how these will influence their subsequent progression in the post.
It’s good practice to make written applications anonymous so the people drawing up a shortlist don’t know the gender of the applicants. You can then compare candidates against the required skills without any risk of unconscious bias.
If your organisation groups jobs into grades or bands, the grading structure must be free of gender bias. There is no single grading system that suits all organisations, but there are some key factors to bear in mind:
- Jobs in the same band or grade should be treated as being equal and should be paid the same.
- Look at the average pay of men and women in each pay grade or band. If you find any differences that can’t be justified, you should update your grading system.
- A single grading structure based on analytical job evaluations will be more transparent, and provide a possible defence to equal pay claims.
Pay progression is when an employee moves up a pay band or scale. This can happen:
- on a specific date, such as the anniversary of their joining the grade, or at the start of the financial year (known as incremental progression)
- when they achieve an agreed performance measure, or
- when they reach a particular level of competence, such as completing a training programme or gaining an additional qualification.
If men in your organisation are progressing to higher pay faster than women, it may indicate unequal pay and you may need to take action by, for example:
- guaranteeing that employees will reach the maximum pay point in their pay band within a reasonable timeframe
- setting time limits within which employees will reach each pay point
- setting target pay points for all staff to reach within a specific time
- setting competency and experience criteria for workers to reach each pay point
- giving those at the bottom of the pay band a higher percentage pay increase than those at the top.
- having shorter pay scales, which accurately reflect the time needed to become fully competent at a job, or
- giving a minimum cash increase to all workers, for example 4% or £500, whichever is the greater. This enables lower-paid workers to move up the scale.
There is no one best method of progression through pay grades. You must decide which is most appropriate for the size of your organisation and the composition of your workforce.
Competence pay is where an employee is rewarded for achieving a set level of competence. You need to make sure there is no gender bias built into how you assess competence or implement competence pay. For example, do you include part-timers, temporary or casual staff, or those on maternity or career breaks?
You also need to ensure that all employees have equal access to opportunities to develop the required level of competence. For example, the timing and location of any training should accommodate part-time employees who may have caring responsibilities or those on maternity leave.
Performance-related pay is used to reward employees on an individual and team basis against performance targets or objective criteria.
It’s often used as a way to incentivise those at the top of their pay band or as a means of progressing employees through the pay system.
The problem is that these types of pay systems are designed to reward employees differently for doing the same job. So unequal pay is built into the system. This can increase the risk of unequal pay between men and women.
To address this, you need to ensure the criteria for rewarding performance are clearly defined and achievable, and that targets are fair across departments. If possible, link the performance to a quantifiable target like sales, which can be seen as objective. However, whilst softer skills like people management - which may be primarily done by women - may be harder to quantify, they should not be excluded from performance pay criteria.
If your performance-related pay (PRP) system is only based on objective targets, you might want to consider including competence or behavioural skills in how the PRP is awarded. Target only based PRPs run the risk of being gender biased and you will need to check for this.
For example if a sales target is the primary means of awarding PRP, how do you adjust for part time workers?
You need to be sure that your PRP considers the real value of different skills or competencies to the organisation fairly and without gender bias.
In most organisations, market forces play a part in setting rates of pay, as pay has to be competitive to recruit and retain employees.
You may want to pay one group of workers more than another, even though their work is of equal value, because the 'going rate' for the job is higher. Other examples of market forces include geographical distinctions, such as London weighting or a skills shortage in one job but not another.
In some circumstances, market forces can provide a defence to an equal pay claim, but the scope is limited. You can’t rely on the fact that the market rate suggests that certain jobs usually done by men are paid more than other jobs usually done by women.
In the event of an equal pay claim, you have to be able to show that you had to pay the additional amount to fill the vacancy because of market forces. It might be easier to demonstrate this if:
- you pay the additional amount as a separate market supplement, rather than consolidating it into basic pay
- you record the evidence that led you to pay the market supplement
- you review the evidence and the additional amount regularly to check whether the additional payment is still justified, or
- you don’t pay the market supplement to new recruits to the role if it’s no longer justified.
By definition a 'bonus' payment is an extra and not part of basic pay. However, contractual bonuses are still defined as pay under the equal pay provisions of the Equality Act 2010 and therefore must not be gender biased.
You may pay bonuses for good reasons, but there is a risk that pay discrimination can creep in. Look at the amount and frequency of bonuses paid to men and women in your organisation over the past year. If there is a tendency for one sex to be favoured over the other, you need to take action.
Begin by establishing criteria for awarding bonuses and make sure everyone involved in the decision-making process knows what these are and how to apply them. Ensure that the performance rewarded is clearly defined and achievable. Make sure employees know what they have to do to get the bonus. If any employees are excluded, be sure that it’s for a genuine reason and not because of their gender.
Also, consider whether your pay system is contributing to discrimination. It may have different bonus schemes for different kinds of workers, such as manual/non-manual, or collective agreements covering different groups of employees.
This can make it hard to compare different groups or realise the impact of certain allowances on individual pay. As a result, your pay system may be vulnerable to the risk of gender bias and equal pay claims.
If you pay different rates for different shifts, or pay higher rates for working unsociable hours, you will need to check that these payments do not favour men over women. If you find differences that can’t be justified, you need to act.
Payments need to be compared, and the value of each type of payment calculated and monitored for gender bias. This is particularly important if you have more than one pay structure and unsocial hours payments are different across the different structures.
To help give women equal access to these payments, consider flexitime arrangements, where employees can choose which hours they work within a set range, or 'annual hours working', where employees work a specific number of hours a year to accommodate any peaks and troughs in the hours they work from week to week.
If managers have discretion over how much people are paid, it needs to be centrally and carefully monitored. This is especially important where performance-related elements of the pay package are concerned.
Line managers may not always realise the potential impact of their decisions on pay for men and women and this can lead to unequal pay. The greater the degree of managerial discretion, the greater the risk.
You need to ensure that managers – or anyone else – involved in making pay-related decisions have a full understanding of equal pay issues. If necessary, send them on a training course or seek professional advice from a body such as Acas.
When you make any decisions or changes regarding your pay system, be sure to document and record them. Not only is this good business practice, it helps to maintain the transparency of your pay system and helps employees understand why they are paid as they are.
It’s also good risk management. If you’re ever faced with an equal pay claim, documentation will be crucial in helping to explain any decisions taken and the reasons behind them.
While every effort has been made to ensure that this advice is accurate and up to date, it does not guarantee that you could successfully defend an equal pay claim. Only the courts or tribunals can give authoritative interpretations of the law.
Last updated: 02 Aug 2018