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Gender pay gap reporting and startups: what are the issues?

15 February 2023

The gender pay gap in UK startups is around 25% - much higher than the UK average. Why is it so high and what can startups do about it?

According to benchmarking platform Figures, the gap is even larger amongst tech startups. At 30%, it’s more than double the national average — and worse than it was in 1992.

This article considers the gender pay gap issues that startups need to think about.

What is a gender pay gap?

A gender pay gap is the difference in pay between men and women. Since 2017, companies with at least 250 employees have had to calculate and report a series of gender pay gap statistics. These are:

  • Mean and median pay gaps
  • Mean and median bonus gaps
  • The proportion of men/women receiving a bonus
  • The proportion of men and women within four equal sized pay “quartiles”.

The mean and median pay gaps have tended to receive the most media attention. To calculate these, hourly rates are obtained for every employee by looking at what pay and bonus they received in April and how many hours they worked. Mean and median hourly rates are then calculated for men and women. The mean and median rates for women are then compared with the same for men and the difference between them is the “gap”.

In calculating these gaps, no allowance is made for the fact that people are doing different jobs (although different methodologies are available to do this). Gender pay gaps don’t necessarily indicate differences in pay between men and women doing the same jobs, but instead are likely to show where there is an imbalance in the proportions of men doing different jobs, often with men occupying more senior and/or better paid technical roles.

Gender pay gap reporting: startups and small businesses

Firstly, let’s just make something clear: startup does not necessarily mean small. There will inevitably have been a point in time when a startup was a small or micro business, but many startups today have workforces of hundreds or even thousands of people. Their size does not negate their startup status.

Some big-name companies are high growth, high innovation businesses which are disrupting established markets and creating new ones. Yet they may be some years away from being fully “mature”.

It is this lack of business maturity that defines a startup. Put simply, a startup is a company in its initial stages of business. It may still be perfecting its product or service, or finding its gap in the market, or settling on exactly how it should operate to deliver its product into the market. Once it has perfected its offering, it might be better classed as a “scaleup”, but we’ll use the term “startup” in this article to refer to either.

Gender pay gaps in UK startups

As mentioned above, gender pay gaps in startups tend to be high. There are a few factors that might be contributing to these higher gaps.

Firstly, startups tend to be tech heavy. Many startups are largely based around tech and, despite lots of excellent initiatives to promote STEM learning to women, tech generally remains a heavily male dominated sector. As a result there are fewer women available to found new businesses or join them in the early stages.

Just 5% of UK unicorns (companies worth $1bn or more) were founded by women. There may be a few reasons for this. It could be that women are more risk averse and less likely to create startups, and there is some evidence to suggest that women dislike taking financial risk. A bigger factor might be that fundraising may be harder for female CEOs of startups. With investors tending to be male, sexist notions of the abilities of women may come into play. Fraudsters like Elizabeth Holmes haven’t helped to dispel this. Sexism might stop viable startups from developing further.

These factors all compounding together may be contributing towards the high gender pay gap amongst UK startups. But there are also more specific issues that startups face and which may be contributing towards pay gaps.

Issues that startups with gender pay gap reporting

Equal pay: less structure around job roles

Gender pay gap reporting is fundamentally about the gender demographics of a workplace. In most employers, equal pay issues tend to have only a very small impact on pay gaps. This is because most employers have well established benchmarking and grading of job roles, ensuring people are paid similarly for similar work.

However, in a startup (and particularly in the early stages), people might find themselves wearing multiple hats. Roles are less strictly defined, with people doing a range of different jobs. Benchmarking can be difficult and pay might not be set according to clear, objective criteria.

This lack of structure can potentially create equal pay issues, while at the same time also make it difficult to identify them.

For any employer to be able to carry out any sort of equal pay analysis, it needs to be able to group together employees doing the same or similar work (“like work”) or those doing work that is different but demands equal amounts of skill, effort and decision making (work of “equal value”). The employer then needs to be able to compare employees to identify any differences, so that it can identify whether there are legitimate reasons for those differences to exist. Without consistent job titles or clearly defined responsibilities, employees can’t be grouped for a “like work” comparison. Without any sort of job grading, there can be no “equal value” comparison.

From an early stage, startups should make use of job evaluation methods so that they can ensure that employees doing like work or work of equal value are being paid equally. Any job evaluation or grading system then needs to be properly applied, and newly created roles need to be placed into the correct grades or levels. It is important to ensure that those doing the same or similar jobs are graded the same, in order to avoid the risk of equal pay claims.

Options, RSUs and equity

The definition of “bonus” for gender pay gap reporting is broad. It includes most share schemes, including stock options and the award of RSUs. These can become lucrative once exercised or vested.

In the early days of a startup, the possibility of valuable equity can be a big draw to attract talent. Depending upon the way it’s set up though, equity awards might create later gender pay gap problems down the line. If options or RSUs vest during April, they would have to be included in the gap calculations. This would be likely to result in very large gaps having to be reported, particularly if the more senior employees with higher awards are predominantly men.

How different growth strategies can affect a gender pay gap

Startups and high growth businesses can develop in different ways. They might grow organically or by acquisition.

Talent that joins a startup early on will end up becoming part of the most senior workforce and probably among the most well paid. This means that, unless female talent is brought in at earlier stages of a startup’s growth, it risks developing a high gender pay gap that is then difficult to shift.

Where that talent comes from depends upon a startup’s growth plans. Will it grow organically, or by acquiring other businesses? The reality is likely to be a mixture of both strategies, and both can impact a startup’s gender pay gap.

Organic growth

As mentioned above, research suggests that men are bigger risk takers in all aspects of life, including in work and their careers. Joining a startup can be a career risk – it might fail and leave the individual jobless with a black mark on their CV from a failed employer. This means that, when recruiting, startups may find themselves forced to choose from an already male-skewed pool. It will therefore become more likely to hire men and so may be at a disadvantage when it comes to attracting female talent.

This means in turn that it is particularly important for startups to make extra efforts to ensure gender diversity when recruiting. Startups need to consider how they are doing this. Are they advertising in places where women are likely to see the adverts? Are recruitment bounties or referral bonuses effective or just rewarding men for hiring from their boys’ clubs? Are women as likely as men to succeed at all stages of the recruitment process?

Growth via acquisition

As a startup grows, it may acquire other businesses to get IP and bolt on new features or vertically integrate its offering, increase its infrastructure and ability to grow, or maybe even absorb rivals to consolidate its market position. All acquisitions will bring new employees with different pay arrangements into the workforce. For example, the acquisition of a big new group of low paid women might push a gap up by reducing average female pay.

Startups can consider the impact that an acquisition might have on its gender pay gap as part of their due diligence. Sometimes, in order to grow, a startup might not have options – if an acquisition is to acquire a particular piece of unique technology, there might be no acceptable substitute. But that might not always be the case. In any event, it is useful information for a startup to have.

Gender pay gap reporting is important for early stage startups

Gender pay gap reporting can be difficult and time consuming. Only companies with 250 or more “relevant employees” have a legal obligation to report their gender pay gap, but young companies looking to pursue a high growth agenda should invest a little time thinking about their gender pay gap from an early stage.

The first step to managing a gender pay gap is to measure it – we find that employers tend to get little value in calculating gaps alone, but there is real value is in trying to understand what’s driving them. This reveals areas of the business with diversity issues, allowing the creation of targeted interventions to increase gender diversity. By making gender pay gap reporting a regular process, it ensures that a business can be aware of issues and be taking action to mitigate or resolve them.

As considerations around the environmental and social impacts of businesses continue to work their way up the global agenda, venture funds are increasingly being asked to report to their investors on the diversity of the companies in their portfolio. Investors are regularly looking into these issues as part of their due diligence, and asking for issues to be addressed.

Diversity and startups

The issues raised above all relate to a broader idea. The calculation and reporting of gender (or ethnicity) pay gaps is not an end in itself, but a way of providing the rigour and regularity that is needed to help ensure a company adequately prioritises diversity. It helps create the infrastructure to keep diversity on the agenda.

Diversity is not a “nice to have”. It is a business imperative. The most diverse companies are the most innovative and most profitable. Homogeneity breeds failure. This means that, right from the start, innovators, disruptors and new company founders need to be thinking about how to ensure they can attract and retain diverse talent.

For more information about how we can help with gender pay gap reporting, find out more.

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