These rules prevent staff from discussing their pay with colleagues and are very common in the financial services industry, where the major part of remuneration is often the bonus rather than the salary.
Harriet Harman MP, the Minister for Women and Equality, said when announcing the proposals: “It is impossible to tackle discrimination when it is hidden. That is why we want a new era of openness when it comes to pay, so that women can see — in their own workplace — just how much more men get paid than them.”
A ban on confidentiality clauses of this sort might affect the way in which employers offer bonuses.
Many employers currently operate wholly discretionary bonus schemes, where the bonus figure is intended to reflect that employee’s performance as well as help with retaining and incentivising them. However, this subjective assessment of an employee’s value is always vulnerable to attack (not only on grounds of discrimination) and can be difficult to justify with hard evidence. Because purely discretionary bonuses are so vulnerable to challenge, it is likely that if gagging clauses are prohibited, employers will look for ways to reduce their risk.
One option is to move to a more objective bonus system based on the team and company performance. This would satisfy the aim of the Equality Bill as it would be easier for female employees to identify whether they are losing out on the bonus round, and might also prove to be less divisive within teams as each member would be rewarded in a similar way.
The risk is that employers may find less tailored bonuses do not retain the highest performers, particularly where an individual significantly outperforms the rest of a team. Average or lower performers could receive unjustifiably large bonuses where a team’s figures are distorted by one stellar performance. This is the sort of outcome that shareholders — particularly institutional shareholders — would want to avoid.
The solution is probably a hybrid — under which part of the bonus structure is linked to team/company performance, but the remainder depends on the employee’s annual appraisal. This outcome will give appraisals a pivotal role in terms of bonus calculation. Managers will have to carry out and properly document appraisals so that they have evidence to defend their bonus decision. This will mean that the employee will have a chance to respond to the manager’s points and correct any inaccuracies. There will be much less scope for ‘back of a postcard’ calculations.
Bonuses have often been used to send a message about poor performance. Of course, there is an inbuilt flaw — the employee will often have no idea that their bonus is low because they do not know what other employees receive. A side benefit of a bonus system tied tightly to appraisals is that proper appraisals can provide a more considered and open method of addressing poor performance.
It is also important to remember that the law already provides a mechanism for employees to obtain information if they feel that their pay has been affected by their gender. An employee can serve an equal pay questionnaire on their employer to find out more about the pay of a comparable employee of the opposite sex whom they suspect is paid more. This is a confrontational step, and one that may not be appealing for most employees, but employers ignore this risk at their peril.
Sian Keall is an employment partner at Travers Smith.