The true cost of pay gaps

Why pay gaps are costing you a fortune. Literally.

Research from the London School of Economics reveals UK businesses lose £4.3 billion annually to pay gap-related turnover. I know. it's a lot. Here's the breakdown to really put that figure into perspective:

1. The replacement tax

Recruiting a mid-level employee now costs 112% of their annual salary. For a company with 1,000 employees, this could mean £5.6 million in avoidable costs.

2. Reduced productivity

Pay inequities can cause teams to take significantly longer to complete projects, and one study found a 22% decrease in output.

3. Wary investors

83% of UK venture capital firms now require portfolio companies to disclose pay gap metrics before funding. It is very interesting to see the link between pay equity/pay gaps and access to investment...

Why addressing pay gaps is getting investor attention

As scrutiny on the 'S' in ESG sharpens, investors are asking tougher questions—particularly about how companies treat their people. Increasingly, firms that actively tackle their pay gaps are not only improving equity—they’re also seeing tangible financial and reputational rewards. Here are two examples making waves with investors:

Lloyds Banking Group: Linking pay equity to performance

Lloyds has taken a proactive step by tying 17.5% of executive bonuses to ESG targets—7.5% of which are specifically related to diversity, equity, and inclusion (DEI). This move shows clear accountability, aligning leadership incentives with workforce fairness.

Investors care because ESG-linked pay is now a key indicator for long-term value. By embedding DEI into remuneration structures, Lloyds is sending a strong signal to ESG-focused investors that it takes the 'S' seriously—making it a more attractive, lower-risk investment.

Baillie Gifford: Outperforming peers on gender pay equity

While the asset management industry averages a 31.3% median gender pay gap, Baillie Gifford’s stands at just 12.7%. The firm also leads in placing more women in upper pay quartiles—a crucial step in addressing structural imbalance.

Baillie Gifford doesn't just report the data—it acts on it. The firm strategically invests in funds aligned to UN Sustainable Development Goal 5: Gender Equality, reinforcing its social impact credentials. This has positioned it strongly with ESG-aligned investors and clients, helping it retain and attract capital.

These examples make it clear: tackling pay gaps isn’t just a compliance issue, it’s a competitive advantage. Investors are watching and the companies taking action are winning on more than just principle, they’re winning on performance too.

Three steps you can take to turn the tide

So what can you to improve your 's' metric in ESG in relation to pay equity and pay gaps? A few simple starter ideas are:

1. Conduct a forensic pay audit (not just the mandatory reporting, dig deep into the root causes and create a strategy to address them).

2. Benchmark against competitors, not national averages. The aim is to focus on metrics that make sense for your sector, not a set of numbers that are meaningless. (However, do not fall for the trap of thinking that simply doing better than your competitors is enough - it's simply a benchmark to see where you sit in your sector.)

3. Tie leadership KPIs to measurable progress. Remember, bespoke metrics will define what you consider to be progress - ie don't just focus on percentage points and numbers, focus on people and impact.

The bottom line
In today's market, pay equity and pay gaps are not solely a HR problem or just another report to fill out every year. It's a powerful lever for reducing costs, retaining talent and unlocking growth.

To address your pay gap issues and improve your ESG metrics, book a call to see how we can support you.

Or you'd rather see how you can improve your 's' metric measurements download our free checklist today.