Firms are coming under increasing pressure to close and disclose their gender pay gaps. The pressure stems from several sources, including, (i) socially conscious investors; (ii) interest groups advocating the incorporation of ESG factors into corporate decision-making and stakeholder capitalism more broadly; (iii) influential capital market intermediaries such as index providers; and (iv) regulators. For example, in recent years the U.S. Securities and Exchange Commission (SEC) has implemented new rules requiring firms to make disclosures about human capital and, more generally, has increased its focus on diversity, equity, and inclusion (DEI) initiatives within public companies.[1]

Advocates argue that there is a solid business case for closing the gender pay gap. The benefits they mention include (i) avoiding reputational and legal risks; (ii) attracting and retaining women; and (iii) obtaining superior financial performance. The latter argument relies on prior research documenting inefficiencies in resource and talent allocation that result from biases against women in professional and business settings (e.g., Hospido et al. 2020, Egan et al. 2017).

However, providing large sample empirical evidence to test these claims has been difficult due to a lack of available data. For instance, while in 2019 U.S. companies with more than 100 employees were required to report pay data, broken down by sex, race, and ethnicity, to the Equal Employment Opportunity Commission (EEOC), that data are not publicly available. Similar constraints on disclosure are found in many other settings.

We overcome this data limitation in a new paper by focusing on the UK. In 2017, the UK mandated public disclosure of median and mean gender pay gaps across hourly and bonus pay for any entity with 250 or more employees. Unlike in other settings, gender pay gap data in the UK are prominently disclosed and saliently displayed. The British government requires firms to post a separate gender pay gap report on their websites – rather than allowing firms to bury these figures in their annual reports – and provides a searchable database of gender pay gap data on a government-hosted website, facilitating broad dissemination. We investigate two research questions of interest to socially conscious investors: (i) do firms close their gender pay gaps after being forced to disclose, and (ii) is gender pay equity useful to investors in predicting future operating and capital market performance?

It is useful first to clarify what the gender pay gap is and what exactly it measures. As reported in the UK, the gender pay gap is defined as the difference between the earnings of men and women, expressed as a percentage relative to men’s earnings. On an aggregate basis, the median male employee is paid 13.1 percent more than the median female employee in the UK. The specific data that entities must disclose include (i) the mean and median gender pay gap; (ii) the mean and median bonus gender pay gap; (iii) the proportion of males and females receiving a bonus payment; and (iv) the proportion of males and females in each pay quartile. To be clear, the reported pay gap number in the UK does not necessarily reveal pay differences between men and women who perform similar jobs or do work of equal value. A higher reported pay gap can indicate either (i) more men in senior, highly compensated roles; (ii) women voluntarily selecting lower paid roles /or dropping out of the workforce at earlier stages of their careers than men; or (iii) women being paid less than men for the same role (which would violate the Equality Act 1970).

We begin by testing whether the introduction of mandatory pay gap disclosure is associated with lower subsequent gender pay gaps. We find a narrowing of the pay gap from the first to the second year of gender pay gap reporting only in small firms with between 250 and 499 employees but no improvement for larger firms. Moreover, the change is economically small at 0.41 percentage points. For these firms, we find suggestive evidence that firms successfully closed their gender pay gaps by changing the composition of their skilled workers, i.e., by hiring more women into high-paid positions. However, we only observe this change in firms with a below-average number of female employees, suggesting that the documented effect is concentrated only in those firms that were able to mitigate their pay gaps through little more than token gestures. In sum, we find that the law has had little effect on firms’ post-implementation gender pay gaps.

One limitation of our approach is that we cannot observe firms’ gender pay gaps in the pre-regulation period and, as such, the approach does not reflect any anticipatory actions firms may have taken prior to the implementation of disclosure. To overcome this limitation, we exploit the institutional development that the rule was announced in 2015 but implemented in 2017. During this period, firms could have pre-empted the regulation in two ways. First, they could have boosted employee pay during the pre-implementation period. To test whether such “leveling up” in employee pay occurred, we compute growth in per-employee wages in 2015-2017 and compare that with wage growth in the pre-announcement period, 2013-2015. We find that firms that report stronger growth in per capita wages subsequently report lower gender pay gaps in 2018. Moreover, this result does not reflect a broader relation between firm growth and the gender pay gap, as we find no relation between the gender pay gap and leveling up, measured using net sales or the number of employees. However, leveling up appears to have been a one-off initiative; it is not associated with any post-regulation improvements in the gender pay gap.

In addition to leveling up employee salaries, firms could have also pre-emptively improved their pay gaps by selectively dismissing employees in a way that would reduce the gender pay gap (i.e., dismissing low-paid women or high-paid men). While we cannot directly observe employee dismissals, we indirectly address this possibility using novel data on Employment Tribunal settlements (drawing upon a soon-to-be released database, Violation Tracker UK). The Employment Tribunal is the primary venue through which employer-employee disputes in the UK are resolved, serving a similar function to private arbitration in the U.S. Most settlements reflect cases where an employer is found to have unfairly dismissed an employee. We posit that firms trying to close the gender pay gap through selective dismissal will be more likely to have some of these dismissals deemed “unfair” to affected employees, which in turn would result in a higher probability of an Employment Tribunal settlement. Consistent with this notion we find that firms facing Employment Tribunal settlements, primarily for unfair dismissals made between 2015 and 2017, have lower gender pay gaps.

Our second set of tests evaluates whether gender pay equity is correlated with firm fundamentals such as profitability, growth, Tobin’s Q, and stock returns. The objective behind these tests is twofold. First, if advocates’ claims about the gender pay gap as a marker of poor corporate culture are valid, one would expect greater pay gaps to be correlated with weaker fundamental and stock market performance. Second, stakeholder demand for gender pay gap disclosure as an indicator of reputational risk would be better supported if one could find correlations between the pay gap and financial performance. However, we find no robust association between gender pay gaps and ROA (return on assets), EBITDA scaled by sales, operating margins, Tobin’s Q, or future stock returns, after controlling for industry pay gap, the proportion of women in the firm’s workforce, and average per-employee compensation as well as fixed effects for industry, year, and parent company headquarters country.

Our inferences are subject to two important caveats. First, only two years of disclosure data are available, and the gender pay gap could improve in future years. Second, we do not have the data to explicitly assess whether the gender pay gap reflects poor corporate culture, which could be manifested as higher turnover and difficulties in attracting and retaining female workers. Nonetheless, we tentatively conclude that the UK’s disclosure rule has had modest implications for gender pay equality in general and for gender pay gaps as a signal about firms’ operating performance and valuation.

ENDNOTE

[1] https://corpgov.law.harvard.edu/2021/05/28/sec-regulation-of-esg-disclosures/.

This post comes to us from professors Aneesh Raghunandan at the London School of Economics and Shivaram Rajgopal at Columbia Business School. It is based on their recent paper, “Mandatory Gender Pay Gap Disclosure in the UK: Did Inequity Fall and Do these Disclosures Affect Firm Value?,” available here.