South African companies are preparing to comply with new Companies Act requirements requiring the disclosure of pay gap ratios between the highest and lowest earners. While widely welcomed as a step towards greater transparency, Martin Hopkins, Master Reward Specialist and member of the South African Reward Association (SARA), cautions that the numbers alone may not tell the full story.
Hopkins warns there is a risk that the public debate becomes overly focused on a single ratio while overlooking the complex realities that drive pay outcomes within organisations.
The Ratio Doesn’t Tell The Whole Story
“The new reporting framework does not reveal much that is not already in the public domain,” he says. “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.”
Pay gap ratios are also heavily influenced by industry characteristics. Companies employing large numbers of lower-skilled workers will report very different outcomes from businesses whose entry-level employees require higher skills and command higher starting salaries.
Unintended Consequences Could Undermine Good Intentions
One concerning unintended consequence relates to the broad definition of “employee” in the legislation, which includes learners and apprentices who typically receive stipends lower than qualified employee remuneration. “A company that invests heavily in learnerships could end up reporting a larger pay gap than one that does not,” says Hopkins. “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 warns that automation, outsourcing, or reducing learner numbers could all improve a reported ratio without meaningfully improving fairness or employee wellbeing. Voluntary disclosure of the pay gap focussed on full-time permanent employees, annualised, or excluding employees who haven’t been employed for the full year would provides a good reflection of the actual outcome of the remuneration policy.
A Large Pay Gap Does Not Automatically Mean Unfair Pay
A large pay gap ratio does not automatically indicate an unfair reward strategy. Executive remuneration is influenced by organisational size, complexity and performance, while industry-specific labour requirements also play a significant role. To mitigate this, comparisons should only be made between comparable organisations, and to the same organisation in previous years.
A further point to consider, is that 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 that measuring the “on-target” pay ratio can address this, reflecting what employees would earn at target performance rather than actual outcomes, providing a more stable measure over time, which is not influenced by organisational performance over time.
Reward Fairness Is More Than A Single Number
Rather than focusing solely on the disclosed ratio, organisations should consider a broader set of indicators, including minimum remuneration for full-time employees, progress towards living wage objectives, and horizontal pay equity across roles of equal value. The financial services sector has led the way on minimum remuneration policies, and in sectors with large numbers of lower-skilled employees, the premium above the statutory minimum wage is a worthwhile indicator.
Measures such as garnishee order prevalence, the proportion of employees earning above a living wage, and the elimination of gender and racial pay gaps provide a more complete picture of reward fairness.
Looking Beyond Compliance
“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,” Hopkins concludes. “That is a far more important measure of success than any single ratio.”
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