Linking remuneration to diversity and inclusion metrics in financial services

This is the third blog in the series looking at the questions asked by the PRA and FCA in their discussion paper. Previous blog posts can be found here:

What is meant by diversity and inclusion? (22 July 2021)
Diversity and inclusion in the financial sector: the regulators want more done, more quickly (21 July 2021)

Accelerating progress without discriminating

Whilst the regulators are targeting the remuneration of senior managers, line managers will be key to the success of any D&I measures. It is line managers who are the decision-makers in recruitment, incentives, promotion and exits, as well as being instrumental in creating and maintaining an inclusive/exclusive culture. 

There is, however, a possible tension in the regulators’ proposals. Caution will be needed to ensure that in an attempt to accelerate progress with D&I, the line is not crossed into positive discrimination, which is unlawful. The point is already made in the FCA’s dual-regulated firm remuneration code, and views are sought on whether it should be incorporated into remuneration code guidance for all regulated firms. 

Discrimination laws generally do not allow an individual to be treated more favourably because of a protected characteristic such as gender or race (what is often referred to as “positive discrimination”). Therefore hiring more women to reach targets would be unlawful, unless those women were the best candidates and the selection could be objectively justified with evidence. It is on that basis that quotas based on protected characteristics would also be unlawful.

By contrast, however, in certain circumstances positive action is permitted. This is where preferential treatment is given to members of a disadvantaged or under-represented group who share a protected characteristic (e.g. gender, race, religion etc). It is permitted in two situations, each with its own conditions: general positive action and positive action in recruitment and promotion.

General positive action

This type of positive action is frequently used by employers and is generally less controversial. Many of the D&I initiatives taken by employers will be based on this provision, which allows an employer to take action in favour of those who share a protected characteristic to overcome a disadvantage, meet different needs, or encourage them to participate in an activity in which their participation is disproportionately low. Targets, mentoring programmes and sponsors would fall within the ambit of general positive action. 

Positive action in recruitment and promotion

Often referred to as the “tie-breaker provision”, this type is less commonly relied upon by employers, and can be a lot more controversial. Positive action in recruitment and promotion enables employers to address disadvantage or disproportionately low participation when making recruitment or promotion decisions. Where both candidates are “as qualified as” one another (to be interpreted broadly as meaning their applications are of equal merit), an employer can favour the individual with a particular protected characteristic, for example if individuals with that protected characteristic are under-represented for the role. For example, if there is a vacant Director-level position, all current Directors are male, and the organisation has equally meritorious applications from a male candidate and a female candidate, the organisation may seek to appoint the female candidate on the basis of positive action. Additionally, the employer must not have a policy of treating persons of the particular under-represented or disadvantaged group more favourably with recruitment or promotion, and the action needs to be a proportionate means of achieving the aim of overcoming or minimising the disadvantage, or encouraging participation. 

This type of positive action is rarely used by employers because it is difficult to establish that both individuals were equal in all respects, and may well be contested. In practice, employers are only likely to seek to rely on this form of positive action in very limited circumstances.

Quotas v targets

As can be seen from the above, quotas are unlawful but targets are permissible. But at what point does a target really become a quota? If individuals are rewarded for meeting targets, or sanctioned for not doing so, is this really a quota by another name? This is the challenge facing many companies, and will need to be thought about carefully in the design, implementation and operation of any D&I metrics.

Could D&I metrics drive progress?

There is little doubt that incentivising particular behaviours in this way works. Many companies, both within and outside financial services, are currently considering D&I metrics, partly driven by the ESG agenda. Design and implementation will require care but it is the “making progress” which can be the most challenging because of the potential to stray across the line into positive discrimination. When trained appropriately, and supported by HR, line managers are the best tool to reach targets in this area.