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Investors Wake Up to UK Banking Gender Pay Gap, but Change Likely to be Slow

As the U.K.'s largest banks reveal stark gender pay gaps, investors are starting to wake up to the need for organizations to be more diverse and inclusive, industry experts say. But while shareholders understand the importance of closing the gaps, it will take time for it to become a priority from an investment standpoint.

All companies in the U.K. with 250 employees or more were required to submit gender pay gap statistics by April 5. HSBC Holdings PLC reported the largest mean hourly pay gap among the big U.K. banks, at 59%, and a median hourly pay gap of 29%. This was followed by Royal Bank of Scotland Group PLC with a 37.2% pay gap, and a 36.5% median hourly pay gap. The U.K.'s insurance industry reported similarly wide differences in pay levels and the gaps have underlined the lack of diversity at senior levels of financial firms.

There were also wide differences in bonuses: HSBC reported an 86% mean gap for bonuses, and a 61% median gap, while Investec Group Investments (UK) Ltd reported a 68.4% mean gap and a median gap of 61.8% for bonuses.

"I do think that shareholders care about this issue but perhaps not enough," Geraldine Gallacher, an executive coach focused on banking and law, whose firm The Executive Coaching Consultancy has advised Bank of America Merrill Lynch International Ltd. on a returning mothers' program, said in an email.

Some investors still disregard the business case for improving gender diversity, and do not believe that there is a correlation between a company's success and greater diversity (both ethnic and gender), she said.

"I have been challenged on numerous occasions about this with some people preferring to think that good companies can 'afford to be diverse' rather than believe there might be some causal link between their presence and improved performance."

Performance-diversity link

Empirical research has shown that more diverse companies perform better: A 2015 survey by McKinsey covering 366 public companies in a range of industries in the U.K., Canada, Latin America and the U.S. showed that those with the highest levels of gender and diversity were more likely to outperform their national industry medians.

Among the 10 largest U.K. bank by assets there is not a clear correlation between a smaller gender pay gap and the bank's performance. HSBC's had the largest gender pay gap but the fifth-highest return on average equity at end-2017, of 6.165%. Nationwide Building Society's ROAE was very similar (6.162% at end-September 2017) but it had the second-smallest mean hourly pay gap of 29%. Lloyds Banking Group PLC reported a 32.8% mean hourly pay gap and a 7.22% return on equity, while Barclays PLC had a mean hourly pay gap of 26% and a -1.31% return on equity. RBS had a 2.85% return on equity.

Mark Freed, CEO of E2W, a membership organization that works with financial institutions to help them to recruit more women in senior positions, agrees that gender diversity is something that should increasingly be on investors' radars.

"As all the evidence points to diverse and inclusive organizations outperforming those that aren't, it should certainly be something that is important to smart investors. When managers are investing in shares they are increasingly looking at the diversity of the underlying firm — and beyond just that of the board. Gender pay gap reporting makes it harder for anyone to hide behind smoke and mirrors," Freed said in an email.

HSBC, RBS and Lloyds all said in gender pay gap or annual reports that the disparity in pay was due to the under-representation of women in senior roles. While 54% of HSBC's overall U.K. workforce is female, only 23% in senior leadership are women. The bank has now set a target of having 30% of senior leadership roles filled by women by 2020.

Lloyds has set a target of having 40% of senior roles filled by women by 2020. In 2017, 34% of senior roles were held by women in 2017.

The "macho, alpha male" culture of financial institutions is dying out, but is still a "root cause" of the gender pay gap, according to Freed.

Struggle to retain talent

"For many, the work on improving the performance of these institutions by transforming them into more diverse and inclusive firms started years ago. Many have already put in place strategies in the four key areas — senior management commitment; recruitment; culture and working practices; and pipeline development. But there is no quick fix to close the gap that is going to take [us] into the 2020's," he said.

The banking industry has particularly struggled to attract and retain female talent since the financial crisis, which has contributed to the pay gap, according to Gallacher.

"The 'casino banking' image, which is only relevant to a tiny minority of bank staff, disproportionately affected women's appetite for a career in banking thereby reducing the number of applicants they have in the first place," she said.

But the gender pay gap data also points to the "maternity penalty," as women regularly either scale back careers in banking after starting a family or are simply not promoted at the same rate as men.

"In the absence of flexible schedules and suitable role models demonstrating a balanced life, you will lose more women than men," she said. "I believe that if you concentrate on allowing more flexibility for both men and women around early parenting years you will encourage more women (who still do most of the childcare even if they're also the primary breadwinner) to apply for bigger jobs. There does seem to be a pattern emerging of people coming back from parental leave and not getting promoted. Jobs that require 24/7 attendance will favor men as society still deems that the buck stops with mothers when it comes to child rearing."