Mirit Ehrenstein and Louise Mason: Changes to remuneration, pay transparency and diversity metrics in 2023

remuneration pay transparency diversityThe end of 2023 saw considerable changes to regulation and guidance around many employment issues, including remuneration, pay transparency and diversity metrics.

The bonus cap has been removed. This means that UK banks that had to limit variable remuneration to 200% of fixed pay are now permitted to pay bonuses at a higher level. The cap did not limit total pay and resulted in exerting upward pressure on fixed pay and reducing the share of pay at risk. Many banks added role-based allowances, topping up fixed pay. The flexibility to reduce fixed pay and deliver a higher proportion of pay through bonuses will be welcome.

However, amending pay structures will involve considering tricky issues, including amending employment contracts, shareholder approval for removing the cap and managing expectations of UK and European Union (EU) staff. Firms may, therefore, tread carefully and implement changes from the 2024 performance year. If so, the 2024 bonus rounds based on performance in 2023 will still adhere to the 2:1 ratio.

Environmental, social and corporate governance (ESG) is likely to be part of any business strategy. Remuneration committees are, therefore, considering ESG metrics that relate to operational or strategic objectives that promote long-term value creation. 2024 may well see such metrics increasingly being used, however, investors expect them to be quantifiable and the method of performance measurement clearly explained, suitably stretching, and linked to implementing strategy.

There is a concern that metrics should not reward executives for business-as-usual activity or be used to increase overall quantum, particularly where financial metrics have not been met. Where employers are still considering how to reflect any ESG corporate strategy in variable pay, this should be fully explained, including how the approach will evolve in future years.

The European pay transparency directive will introduce gender pay gap reporting obligations, backed up by powerful enforcement mechanisms. In particular, employers that will be caught by the regime should note that a report indicating an average pay gap of 5% or more, which is not remedied within six months of the date of submission of the gender pay gap report, will trigger a compulsory pay audit. Bearing in mind that the European Union gender pay gap currently stands at around 14%, for many employers there is a long road to compliance and scrutiny of pay data should start now.

The outcome to the government’s 2019 consultation on the introduction of ethnicity pay gap reporting contained no surprises: it confirmed that no mandatory obligation will be introduced. Despite this, many diversity, equity and inclusion-focused employers now voluntarily report ethnicity pay gap data.

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The next frontier in pay gap reporting is the class pay gap. As with all strands of pay reporting, a key challenge is obtaining the relevant employee data. Progress is expected in the financial services industry, in which the regulators are currently consulting on the introduction of voluntary reporting on employee socio-economic background.

Mirit Ehrenstein (pictured right) is a counsel and Louise Mason (pictured left) is a senior associate at Linklaters