South African companies are preparing for new Companies Act requirements that will require businesses to disclose pay gap ratios between their highest and lowest earners. While the move has been widely welcomed as a step towards greater transparency, remuneration specialist Martin Hopkins believes the figures should be interpreted with caution.
According to Hopkins, a Master Reward Specialist and member of the South African Reward Association (SARA), a single pay gap ratio does not necessarily provide a complete picture of fairness within an organisation.
The ratio doesn’t tell the whole story
Hopkins says the new reporting framework is unlikely to reveal information that is not already publicly available.
“Executive remuneration is already disclosed in detail, while the statutory minimum wage establishes the lowest legal pay level. What may surprise many stakeholders is that the average remuneration of the top 5% is often significantly lower than that of the most senior executives, due to the steep pay gradient at the top of many organisations.”
He explains that pay gap ratios are heavily influenced by the type of business being measured. Companies employing large numbers of lower-skilled workers will naturally report different ratios from businesses where entry-level employees require specialist skills and earn higher starting salaries.
Unintended consequences
Hopkins also warns that the legislation’s broad definition of “employee” includes learners and apprentices, who typically receive stipends that are lower than the salaries of qualified employees.
“A company that invests heavily in learnerships could end up reporting a larger pay gap than one that does not,” he says. “It would be unfortunate if organisations reduced their investment in addressing youth unemployment and creating opportunities for young work-seekers simply to improve their reported ratio.”
He adds that automation, outsourcing or reducing the number of learners could improve a company’s reported pay gap without improving fairness or employee wellbeing.
Hopkins believes voluntary disclosure focusing on full-time permanent employees, annualised salaries or excluding employees who have not worked for a full year would provide a more accurate reflection of an organisation’s remuneration policy.
A larger pay gap does not always mean unfair pay
According to Hopkins, a large pay gap should not automatically be viewed as evidence of an unfair reward strategy.
Executive remuneration is influenced by factors such as organisational size, complexity and performance, while industry-specific labour requirements also affect overall pay structures.
He says meaningful comparisons should only be made between similar organisations or against a company’s own historical results.
Performance-related pay also plays a role.
“In good years, where an organisation performs well, the remuneration received by higher-paid employees is proportionately higher than that of lower-paid employees because a larger portion of their pay is at risk and performance related, as required by institutional shareholders.”
Hopkins suggests measuring an “on-target” pay ratio instead, reflecting what employees would earn if performance targets were achieved, rather than actual payouts that fluctuate from year to year.
Fairness involves more than one number
Rather than focusing only on the disclosed pay gap ratio, Hopkins believes organisations should consider a broader range of indicators.
These include:
- Minimum remuneration for full-time employees.
- Progress towards living wage objectives.
- Equal pay for roles of equal value.
- The percentage of employees earning above a living wage.
- Gender and racial pay equity.
- The prevalence of garnishee orders among employees.
He notes that the financial services sector has already made significant progress in adopting minimum remuneration policies.
Looking beyond compliance
Hopkins says the real objective should extend beyond meeting legislative requirements.
“The challenge is to look beyond compliance and continue building organisations that create economic value, social value and meaningful opportunities for employees at all levels,” he concludes. “That is a far more important measure of success than any single ratio.”
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