My thoughts on the House of Lords debate on Ethnicity Pay Gap Reporting

Is pay gap reporting about transparency or accountability? This was the main theme of the House of Lords debate on Ethnicity Pay Gap Reporting (EPGR) on 25th October 2021, unlike the Commons debate that preceded it in September. The 9 peers who spoke could be split between those who see EPGR as an exercise in employer transparency and those who see EPGR as an exercise in employer accountability and I consider this to be a fundamental question that has not yet been answered. In this article, I will discuss the implications of both answers to this question for any future EPGR legislation.

Links to the debate and supporting material

My 9-point briefing note for MPs & Peers – which includes a list of 6 EPGR-related blogs I’ve written
My thoughts on the Commons EPGR debate on 20th September 2021 – which includes links to the debate itself & background materials
The planned speakers list for the Lords debate on 25th October 2021
TV recording of Lords debate on 25th October 2021 via YouTube and Parliament TV.
The transcript of the Lords debate
My live-tweet thread during the debate

The debate – what did Peers say?

9 Peers spoke in the following order. Lord Bhatia who was listed as a speaker (see link 2 above) did not speak.

Lord Boateng (LAB) – I emailed my 9-point briefing note to him ahead of the debate and he was kind enough to acknowledge receipt and to share his expectations of the debate.
Lord Bishop of Bristol (Bishops)
Lord Bilimoria (Crossbench), President of Confederation of British Industry (CBI)
Lord Sikka (LAB)
Baroness Falkner (Crossbench), Chair of Equalities & Human Rights Commission (EHRC)
Baroness Prashar (Crossbench)
Baroness Blower (LAB)
Baroness Blake (LAB)
Lord Callanan (CON), Parliamentary Under Secretary of State, Department of Business, Energy & Industrial Strategy (BEIS)

I noted the following comments from each peer which I have copied and pasted from the transcript in link 5 above. I will expand on many of these points in the next section

Boateng – “This can be incremental; it does not have to be done overnight. It does not have to involve all employers employing more than 250 people at once; it can be done incrementally“
Bishop of Bristol – “There are industry-standard methods of minimising the risk of inadvertently publishing data from which individuals and their personal data can be identified, which typically involve supressing the publication of any statistics relating to fewer than 10 cases. In line with this, provisions could be made to ensure that employers do not publish data relating to subcategories of employees in which there are fewer than 10 cases. However, employers could still be required to collect such data regardless of subcategory size, publish it in a more highly aggregated form so that no subcategory has fewer than 10 cases and share their data with a trusted third party, such as the ONS, which could analyse data provided by all employers and report results in a way that safeguards against disclosure of personal data or identities.“
Bilimoria – “McKinsey data from 2019 shows very clearly that the top quartile of companies that embrace diversity and inclusion are 36% more profitable than the bottom quartile. Deloitte has conducted surveys that show that companies that embrace diversity and inclusion are more innovative.“
Sikka – “… legislation to achieve the following six objectives: mandatory ethnicity pay gap reporting; directors providing binding plans to reduce the ethnicity pay gap and increase diversity; increased diversity and reduction of the ethnicity pay gap forming part of executive remuneration contracts; auditing of this data by trade unions and works councils, not accounting firms that cannot be trusted to deliver any honest audit; sanctions from the Government, including refusing to give public contracts to entities which are not reducing their ethnicity pay gap and an annual report from the Government explaining how their policies are addressing ethnicity pay gap issues?“
Falkner – “… we appreciate that a binary reporting requirement similar to that for gender would potentially tell us relatively little about the particular barriers facing individuals or certain ethnic minorities or, indeed, suggest what responses are needed from employers… tracking outcomes at key stages in the employment journey—recruitment, retention and progression—offers much greater insight into the specific barriers facing groups. It is also essential to ensure that any future reporting mechanism has large enough employee sizes to ensure the right to anonymity is preserved.“
Prashar – ” … we must not make the best the enemy of the good. Arguments about complexity are not a convincing reason for not making pay gap reporting mandatory. Furthermore, pay gap reporting is not intended as a perfect statistical tool but a helpful snapshot as a guide for further probing and consequent action. As others have said, it not a silver bullet but one other important tool to assist action on promoting equality of opportunity.“
Blower – “One of the difficulties put forward, as I understand it, is the issue of sample size and workplace segregation. However, Professor Susan Milner of the University of Bath says – “Pay gap reporting in its current form, bear in mind that 11% of companies do produce data, is not meant to be a robust statistical tool. It provides a snapshot of workforce composition and pay at any given point” The point of pay gap reporting is to oblige employers to examine their data and work out what disparities might exist.“
Blake – “… they must go further than just mandatory ethnicity pay gap reporting. We also need to close the gap with a new requirement on employers to report and eliminate pay gaps. This can begin with the implementation of action plans to eradicate inequalities in the workplace …“
Callanan – “We are committed to taking action, but we want to make sure that we are doing the right things that will genuinely help to move things forward. Key to that is determining what it makes sense to report on and what use the data may be put to … we are working through to find the right balance between data that is actionable and comparable and the business burdens.”

The following employers were mentioned as examples of ethnicity pay gap reporters during this debate and the Commons debate in September. All currently report their gender pay gaps and you can find these here. All of these employers state they have more than 1,000 employees.

John Lewis, Network Rail, PricewaterhouseCoopers, Ernst & Young, Natwest, Barclays, Lloyds Bank, Zurich Insurance

My thoughts on the debate

The government response in this debate was the same as put forward in the Commons debate last month. They are still working through a variety of considerations before coming forward with proposals at some unspecified date. Those of you who read my summary of the Commons debate will have seen my list of meetings I have had with special advisors, civil servants, MP and ministers so I probably have a greater insight than most as to where the government’s thinking is at present. Lord Callanan’s statement does not contradict anything I’ve picked up from those meetings and I believe these statements can be taken at face value.

What distinguished the Lords debate from the Commons debate was that Peers spent more time than the MPs talking about what the purpose of EPGR was. Having gone through the transcript, I believe I can group the 9 speakers by whether they appeared to prioritise employer transparency or employer accountability.

Accountability – Bilimoria, Sikka, Blake, Callanan(?)
Transparency – Boateng, Bishop of Bristol, Falkner, Prashar, Blower

I’ve put the government in the accountability group since my understanding is that the government is not interested in an EPGR system that becomes merely a data collection exercise and thus an administrative burden on employers, rather it should be something that leads to genuine change for the better. If one reads the passage I picked above from Lord Callanen’s speech which includes the word “actionable”, I don’t take this to mean that employers will be required to set binding targets on managers as suggested by Lord Sikka, whose approach to accountability I am not in favour of. Rather, I interpret this to mean that any data reporting process should make it easy for employers to see where and why they have a pay gap and how much work they need to do in order to make progress.

The stumbling block though for any pay gap that compares a majority population with a minority population like ethnicity is small sample sizes since any statistic derived under such circumstances will have a very large margin of error (my article “Life on Mars” demonstrates how large these can be). I am sure no-one will argue with me if I say that if the metrics that are being measured are inaccurate due to unacceptably large sampling error then by definition, it is not possible to use such metrics for employer accountability, especially when such data is interpreted by HR professionals with little or no statistical skills. To do so would be fundamentally unfair to the employer.

The only way you can make such metrics sufficiently reliable to hold employers to account is to increase the minimum sample size of each category of employees that is reported on. This is the logic that underpinned the Royal Statistical Society’s recommendation (I was a co-author of this) that this minimum should be at least 100 employees and it worth noting that in both the Commons and Lords debate, the government made a point of referencing this recommendation. In my blog “How many categories should an employer report?” I showed that given the current ethnic breakdown of the UK, mandatory EPGR cannot apply to employers with less than 1,000 employees since under that threshold, at least 70% of employers will not even be able to report data for at least a minimum of 20 ethnic minority employees, let alone a minimum of 100 employees.

That’s why I was pleased to see Lord Boateng’s comment that mandatory EPGR could be introduced incrementally and “… does not have to involve all employers employing more than 250 people at once”. This marks the first time I’ve seen an opposition politician recognise that EPGR requires a different approach than the current gender pay gap reporting (GPGR) system. I was also pleased to see the Bishop of Bristol put forward suggestions over minimum sample sizes (10+) for anonymity and Baroness Falkner (EHRC chair) stating that EPGR really needs to involve 3 or more ethnic categories (of sufficient sample size!) for it be meaningful. Both speakers are reflecting what I said in my blog referred to in the previous paragraph.

However, I want to explore some of the points made by the Transparency group since I do agree with many of them. I was particularly struck by Baroness Blower stating “is to oblige employers to examine their data and work out what disparities might exist”. I note also Lord Prashar describing EPGR as merely one tool of many for addressing inequality. Most notable of all was the Bishop of Bristol’s suggestion that employers should submit their data to the ONS who would analyse the results so as to minimise inadvertent disclosure risks. This suggestion is very similar to option 5 from my article “How could EPGR be introduced in the UK?” where instead of the ONS, I suggested that employers submit their data to a suitable industry body who would then compile and report data for that industry rather than individual employers. I noted then that the difficulty with that suggestion was that it transferred accountability from an individual employer to a representative body of employers which must weaken accountability overall. But if transparency is more important than accountability then this is an option to consider.

If Parliament deems transparency to be more important than accountability, then it would be possible to require all employers above 250 employees (or even a lower threshold) to submit ethnicity pay gap data. In return though, Parliament would have to pass measures to protect smaller employers from being unfairly criticised or held to account for data that will have very large margin of errors. Option 1 of my aforementioned article “How could EPGR be introduced in the UK?” suggested that all ethnicity pay gap data submitted should be audited a suitably qualified statistician who would pronounce whether the data was reliable enough for public interpretation and accountability. Obviously this adds cost to the employer and ultimately no statistician can overcome really small sample sizes so I think the end result would still be that the majority of small employer data would be pronounced unreliable for accountability purposes.

In the end though, if Parliament desires more granular data with respect to ethnicity pay gaps then the ONS should be set the task of collecting such data rather than requiring employers to become unpaid data collectors. For this reason, whilst I do agree with the comments made by Peers regarding employer transparency, I ultimately do agree with the government that whatever system is introduced has to lead to real change based on robust data and that puts me mostly in the accountability camp. I have forwarded 7+5 recommendations to the government which are intended to improve the existing GPGR system and also be the framework for a mandatory EPGR system for employers with 1,000+ employees. If these recommendations are adopted, I believe employers will find it easier to diagnose their existing pay gaps and to take actions to change things. For smaller employers, EPGR will have to continue to be voluntary but I would hope that after a few rounds of reporting, enough lessons would have been learned that may make it possible to extend mandatory EPGR for smaller employers i.e. incremental progress as suggested by Lord Boateng.

Would you like to discuss your EPGR ideas?

I finish with a public offer to meet & discuss the complexities of EPGR and the possible trade offs to anyone who is interested. For those who are not interested in understanding the statistical complexities involved with EPGR, I will continue to publicly challenge & criticise you if you think a magic potion called “government guidance” can solve the statistical & data issues involved or if you think HR professionals are more than capable of solving statistical challenges that have challenged professional statisticians for over a century and continue to do so today. Any campaigner who chooses to confront the trade offs and put forward their proposed trade off will receive my enthusiastic support so please do contact me with your proposals.

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