Developing and communicating your Long Term Incentive plan to help address gender pay gap
As part of the gender pay gap series from FTI Consulting, this article focuses on the impact of gender pay gap reporting as you design and communicate your equity-based Long Term Incentive Plan (LTIP) – be it an existing or proposed new plan(s).
As of 4 April 2018, the Equality Act (Gender Pay Gap Information) Regulations 2017 legally requires all organisations with over 250 employees to publish their annual gender pay gap, with the final aim of providing organisations with a benchmark for their industry. This includes the difference between mean and median pay of men and women, the differences in the bonuses they receive and the proportion of each gender receiving a bonus.
“Ensure when communicating your LTIP that it fits within the wider corporate framework of your organisation’s Employee Value Proposition (EVP)”
Gender pay gap reporting has dominated the headlines this summer. Since the legislation came into force in April 2017, 42 organisations including the BBC, TSB Bank, PwC and Virgin Money have complied (as of early August 2017). Sparks flew, when, under the terms of its new Royal Charter, the BBC revealed a gender disparity in the pay of its stars earning over £150,000.
Organisations with gender pay gaps are rightly concerned about the reputational impact and we would advocate that companies use this regulation as an opportunity to revisit a variety of operational and compensation processes to ensure they are fit-for-purpose in attracting a dynamic and diverse talent pool—and ensuring that compensation practices reflect their stated values and ethos.
First things first, ensure that your Long Term Incentive Plan (LTIP) is fit for purpose to help address gender disparities.
1. Be clear on if you have gender pay and why
There are many reasons why companies may have a gender pay gap: there may be more men sitting in senior positions; or more men than women sitting in higher-paid areas of the business; or it could also be the case that men within similar pay bands to women are being remunerated more highly.Each of these will have different organisational causes, some that may be legitimately explained, and some less so.
Regardless of the reasons, it is important to understand where your company sits and be clear on how the organisation will seek to remediate these factors and where changes to the LTIP can be the most effective.
2. Ensure alignment and understanding with your Employee Value Proposition
The employee value proposition (EVP), quite simply, is the reason why employees should want to work for your organisation—and stay with your organisation. While compensation and benefits are a part of the EVP, a well-rounded EVP also reflects other tangibles and intangibles that attract and keep people such as culture, development opportunities, levels of diversity, travel opportunities, etc. It is important to align your compensation plans and LTIP with your employee value proposition.
Many companies are proactive in recognising that they are not the highest-paying in a sector and instead focus on the experience and development opportunities that they can provide to their employees. Where companies run into trouble is when their compensation and benefits do not align with their EVP or their stated values.
This is another reason why companies with a significant gender pay gap will find the reporting process much more reputationally damaging if their EVP has previously touted diversity and opportunities for progression but their gender pay gap suggests they are failing to fulfil these values.
3. Develop or articulate Employee Value Propositions (EVP) through a data-driven process
Whilst LTIP(s) alone will not solve gender pay gap issues, it is a common belief that a well-designed LTIP that is aligned with the business can help an organisation incentivise and retain its key employees. It is vital that the plan is bespoke and a number of factors will need to be considered including the regulatory landscape, the specific objectives of the plan, identifying who should participate and the appropriate levels of reward that the plan could deliver.
Other factors to consider: gender pay gap should not be the sole driving force behind the design of your LTIPs, but you do need to consider the impact your LTIP could have on future gender pay gap calculations.
Challenge yourself to ensure that the LTIP is locking in and incentivising key employees. The discussions around gender pay gap provide an opportunity for you to validate objectively that the employees being targeted are indeed the ones that you want to develop and progress. If you are implementing a new LTIP; consider a specific policy note on the gender pay gap issue to show directional change.
“A well-designed LTIP that is aligned with the business can help an organisation incentivise and retain its key employees”
4. The gender pay gap calculations in your LTIP – the devil is in the detail
Typically, participation in LTIPs is reserved for the most senior, usually predominately male, employees within an organisation. These significant gains for them could impact your gender pay gap calculations. You may operate other all-employee share based plans (eg SAYE, SIP) and these on the whole should not impact your gender pay gap calculations as they will not be ‘taxable pay’ for the purposes of the calculations.
However, if you are in the process of implementing a new LTIP, think carefully about how the tax treatment of this plan will impact your gender pay gap reporting. The calculations can produce interesting results for remuneration that is in the form of shares or share options that become taxable within the relevant pay period.
For example – the timing of when share options are exercised can impact the gender pay gap calculations if the taxable point falls within the relevant pay period. Other issues for consideration include (for share options) the calculation period run from the date of grant to date of vesting, or date of grant to date of exercise? Should you amend vesting/exercise dates if they would otherwise fall within the relevant pay period? Do you need to add any specific commentary in your reporting to explain any anomalies?
5. When rolling out an LTIP, consider the wider corporate context
Ensure when communicating your LTIP that the strategy fits within the wider corporate framework of your organisation’s employee value proposition. Also communicate the LTIP so that it supports the narrative you have around any potential discrepancies in gender pay gap. If you have made changes to your LTIP in part to remediate your gender pay gap, then be transparent about that to demonstrate the organisation’s commitment to redressing any compensation imbalances. It is important that you communicate all the ways that potential gender pay discrepancies will be addressed – whether through changes to development, recruitment, etc.
For companies that do not have any significant gender pay gaps, then the roll-out of a new LTIP should serve as another opportunity to reinforce ongoing commitment to equitable compensation practices.
6. Finally, follow the golden rules for compensation communications
Use the roll-out of any new all-employee LTIPs to remind employees of ALL the benefits they receive from the organisation: whether this is the tangible ‘comp and benefits’ to the more intangible that contribute to EVP, such as the culture, training and opportunities for advancement.
For discretionary-based LTIPs, position in the context of industry benchmarking if relevant. If you are making changes to the LTIP to reflect changes happening across the industry, be honest. If you are choosing to be an outlier for a strategic reason, be honest about that as well.
Be sensitive: if not all employees are being included in the LTIP, then don’t include them in messaging that feels exclusionary. That said, be clear on the stepping stones in career progression that help employees see the path to promotion, pay raises, and participation in LTIPs.
A well-designed LTIP could be an important means of helping address gender pay gap within the wider objective of supporting a diverse, inclusive workforce but alone it won’t be the silver bullet. If your organisation does have a gender pay gap, addressing the root causes of this should also provide you with opportunities to assess your employee value proposition to ensure you are attracting and keeping the talent that is best suited to accelerate your business objectives.
Experts with Impact: how we can help
All companies must be compliant in reporting by 4 April 2018.
At FTI Consulting we can help:
Develop communications strategies to help you internally communicate, manage and plan ahead around your gender pay gap findings
Manage and prepare for external reputation risk with media audiences
Develop or articulate employee value propositions through a data-driven process
Advise on the impact that your LTIP(s) will have on your gender pay gap calculations
Design and implement LTIPs that are aligned to corporate objectives
Develop coaching programmes to help support the upskilling of leaders
Develop leadership coaching for female leaders at board level
This is the latest in a series FTI Consulting is running in 2017 and 2018 to assess how companies are reporting and addressing gender pay gap.
Topics we will cover in our series on gender pay gap include:
Strategies for developing an equitable and efficient compensation scheme
Designing and delivering professional development programmes that engage men and women
The role of unintentional bias in hiring, promoting and allocating projects
Strategies for remediating gender pay gap across a range of sectors