Internal pay equity

Internal pay equity - regulators step in

The Department of Labour has amended the Employment Equity Regulations to include an updated EEA4 form applicable to designated employers. It also serves as the format for an Income Differential Statement which must be submitted annually in October to the Department of Labour.

Group of people sitting at table together

Reporting on the internal pay ratio

The Department of Labour has amended the Employment Equity Regulations [1] to include an updated EEA4 form (Statement of Income Differentials in terms of section 27 of the Act) [2] applicable to designated employers. It also serves as the format for an Income Differential Statement which must be submitted annually in October to the Department of Labour. The form is applicable to designated employers who employ 50 or more employees, or have a total annual turnover that exceeds the annual turnover of a small business as prescribed. Designated employers can include listed and unlisted companies as well as state-owned enterprises, government, and non-profit organisations that fall within the definition.

References:

1. Employment Equity Regulations, 2014 GN R595 GG 37873, 01 August 2014.
2. EEA4 form, Employment Equity Regulations, GN R1057 GG 42627, 08 August 2019.

 

The previous version of the EEA4 form required the disclosure to include cash payments, housing or accommodation allowances or subsidies, car allowances, employer contributions to medical aids, etc. It expressly excluded share incentive schemes or discretionary payments. It also excluded the disclosure of temporary employees.

The objective is to collect information for the assessment of the remuneration gap between the highest paid and lowest paid employees and at the same time, assess inequalities in remuneration in relation to race and gender in the various occupational levels:

  • All employees, including Foreign Nationals and temporary employees, must be included when completing the form.
  • The form defines remuneration as any payment in money and/or in kind and includes fixed and variable remuneration. The calculation must be spread over 12 months and reflect the same reporting period as the EEA2 form (the report to the Director- General in terms of section 21 of the Employment Equity Act[3]). Where an employee has not worked for a full 12 month period, the amount must be annualised.
  • Fixed or guaranteed remuneration includes inter alia salaries or wages, travel allowances, housing or accommodation subsidies, employer contributions to medical aid, pension, and guaranteed bonuses or 13th cheques, etc. Variable remuneration includes short term incentives (including deferrals and commissions), discretionary payments which are not related to an employee’s hours of work or performance, long-term incentives which has a vesting period of longer than one year (irrespective of whether they are retention or performance-based), the taxable portion of bursaries and scholarships provided to the employee, and dividends to the extent that the latter are included as remuneration in the fourth Schedule of the Income Tax Act [4]. When it comes to long-term incentives, the words “paid out” in paragraph 6 of section B of the EEA4 form suggest that will only include long-term incentives which were settled in the reporting  period, and not the value of unvested awards – however, it is unclear whether the Department of Labour will interpret this provision in the same way.
  • There are certain exclusions, e.g. gratuities and non-employment related lump sums such as severance pay.

Remuneration information is required for the lowest paid individual at the lowest occupational level and the remuneration of the highest paid individual for each of the occupational levels within the organisation in terms of the population group and gender.

References:

3. Act 55 of 1998 as amended.
4. Act 58 of 1962 as amended.

What do you have to disclose?

In addition to the tables recording the number of employees and income differentials at each  occupational level in terms of race and gender, designated employers must indicate the following:

  • The average annual remuneration of the top 10% of their top earners
  • The average annual remuneration for the bottom 10% of their bottom earners
  • The median earners remuneration in the organisation.

Organisations will be required to indicate whether or not they have a policy in place to address and close the vertical gap between the highest and lowest paid employees in their workforce. Against this backdrop organisations are required to:

  • disclose the vertical gap between the highest and lowest paid workers in the organisation in terms of the policy, expressed as a multiple; and confirm whether or not the remuneration gap between the highest and lowest paid employees in the organisation is aligned to the policy to address that vertical gap,
  • indicate whether AA (Affirmative Action) measures to address the remuneration gap are included in the organisation’s EE (Employment Equity) plan,
  • select a key reason for the income differentials. This can include, inter alia, seniority / length of service, qualifications, performance, demotion, experiential training, shortage of skills, or transfer of business,
  • the form must be signed by the Chief Executive Officer or Accounting Officer.

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Must this information be publicly disclosed?

Not in terms of the legislation. According to section 10 of the Employment Equity Regulations, an Employment Equity Report is a public document, but the Income Differential Statement reflected in the EEA4 Form is expressly excluded from this rule.

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Some implications

The information that must be disclosed suggests that where there is an income differential identified through this reporting process, it must be justifiable. Proper job profiling and job grading, which considers the key principles of Equal Pay for work of Equal Value as well as the factors set out in section 6 of the Employment Equity Regulations can assist with this process and help organisations identify unjustifiable differentials in pay.

Against this backdrop, disclosing the vertical pay gap and whether there is a policy to address this will require that organisations seriously consider the adoption of an internal fair pay charter or framework. That charter should clearly set out an organisation’s philosophy towards fair and responsible remuneration, monitoring the organisation’s fair pay barometer, and identifying the ways in which the organisation can address its internal income differentials in a sustainable manner. While listed companies have taken it upon themselves to actively analyse their internal pay ratios and develop policies addressing this, unlisted companies should also take action by identifying their internal pay differentials, develop a policy framework around fair pay, and put plans in place to eliminate unjustifiable differentials in pay.

Remuneration Committees should work closely with their counterparts in the Social and Ethics Committee and actively identify and understand how income is distributed throughout their organisation.

The implications of the EEA4 form will be explored in more detail in the 13th edition of the Non-executive directors: Practices and fees trends report which will be released in January 2020.

 

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How can we help?

 

  • Wage gap analysis to determine whether there is inequality within the company’s remuneration structure through a variety of methods:
    • Gini coefficient – can be used to analyse and measure the degree of income inequality within a company. The range is from 0 to 1, with 0 being full equality, i.e. all employees are paid equally and with 1 being the most unequal
    • Palma Ratio – focuses on the differences between the top and bottom income bracket. It provides a ratio of the highest 10% of the company’s share of total remuneration divided by the poorest 40% 's share.
    • Comparing CEO’s remuneration to the remuneration of the lowest employee and the average employee
    • Detailed grade-based fair pay analysis, indicating areas where race or gender-based factors appear to be influencing pay, for further analysis
  • Assistance with reviewing or performing your calculations for the EEA4 form income gap analysis.
  • Development of a fair and ethical pay policy which records the underlying principles, annual targets, supporting procedures as well as the tools which will be adopted to measure and monitor adherence to the policy.

 

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Contact us

Rene Richter

Partner, PwC South Africa

Tel: +27 (0) 11 797 5067

Gizelle Erwee

Associate Director, PwC South Africa

Tel: +27 (0) 21 529 2273

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