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Government plans to introduce pay ratio reporting ‘within months’

25 Apr 2018 By Dawn Lewis

Disclosing CEO-to-worker ratios ‘will increase transparency’ – but some remain sceptical about whether figures will be meaningful

The Department for Business, Energy and Industrial Strategy (BEIS) has confirmed that it still intends to bring in significant changes to corporate governance by June that will see companies report on their executive pay ratio – despite legislative delays and scepticism about the robustness of the proposals.

In August 2017, the government pledged to lay draft secondary legislation before parliament by March 2018, requiring UK companies to annually report on the ratio of CEO pay to the average pay of their UK workforce. 

However, the legislation enacting this measure has yet to be released. The changes were announced in the government’s response to a green paper on corporate governance reforms. 

In addition to reporting CEO-to-worker pay ratios, the government said it intended to introduce legislation requiring businesses to provide a narrative explaining that ratio – in the context of pay and conditions across the wider workforce – and an explanation of remuneration policies and potential outcomes from complex, share-based incentive schemes.

BEIS said the aim of the amendments – along with the Financial Reporting Council’s revisions to the UK Corporate Governance Code to tighten transparency around executive pay – was to introduce a corporate governance regime that improves business performance and encourages an economy that “works for everyone”. 

However, Roger Barker, head of corporate governance at the Institute of Directors, said he believed it would be difficult to compare pay ratios across companies and draw conclusions about whether executive pay at a specific company is too high or too low.

“We are sceptical about the impact that the publication of executive pay ratios will have on the issue of executive pay at individual companies. Companies differ greatly in terms of their average level of pay depending on their size and sector,” he said.

“Where the pay ratio is perhaps of most interest as an economic indicator is at the level of the overall economy. 

“This aggregate figure [which has been estimated at around 129:1 within the FTSE 100] does tell us something interesting about the development of executive pay over the last couple of decades – namely, that overall rates of increase at major listed companies have been excessive relative to the rewards enjoyed by other stakeholders.”

Deborah Rees-Frost, director at Innecto Reward Consulting, suggested that publishing a pay ratio was not as simple as it sounded. “The problem with the ratio reporting is that it is extremely dependent on the industry type. Some of the highest ratios will be in retail, whereas lower ratios will appear in industries such as asset management,” she said. “The media have struggled with reporting gender pay, which is quite simple really in comparison to the ratios – which will be more nuanced and complex.”

A number of new executive pay scandals have highlighted the need for the new legislation, however, and many of the government’s provisions were criticised as being watered down from the prime minister’s original pledges in this area.

The rules will require companies to reveal ratios for the first time, although, as Charles Cotton, pay and reward adviser at the CIPD, highlighted, executive pay has been in the spotlight for several years. 

“If you’re a public limited company you’re required to publish details of the CEO pay package, as well as have a vote on what has been awarded,” he said. 

“What has been missing is how pay compares to those in the rest of workforce. This will help to shine a light on what executives are being paid, why they are being paid, how and when. It may throw up issues around the extent the performance of the organisation is down to one person.

“There has been an issue around fairness – and hopefully this will lead to a discussion around whether the organisation is rewarding people appropriately.” 

The move to introduce pay ratio reporting follows the implementation of gender pay gap reporting, which highlighted significant gender pay discrepancies in UK companies of 250 or more employees. 

Luke Hildyard, High Pay Centre director, said gender pay reporting had prompted a useful debate about the UK’s working culture. “Similarly, ratios can show us the scale of pay inequalities and encourage people to question what it is that causes the gap between those at the top and everyone else, what are the consequences of this gap and what measures we could implement to close it,” he said. 

This could relate to “education and skills, improved corporate governance, or workplace voice, for example”, said Hildyard.

Although he doesn’t believe that pay ratio reporting alone will tackle excessively high pay, he does believe it will have a positive impact. “It will provide better data to inform the debate about top pay and pay inequality, raise awareness and improve our understanding, thereby hopefully leading to a consensus on other policies and practices that can tackle the top pay problem,” he said.

The discrepancy between CEO and average worker pay was highlighted earlier this year when calculations published by the CIPD and the High Pay Centre suggested that pay for leading chief executives will pass the median UK gross annual salary of £28,758 for full-time employees just three days into the working year.

Beyond executive pay, the government said it would introduce other measures to further tighten corporate governance. These included ways to ensure that employees are taken into account in the boardroom, many of which have yet to be detailed or implemented. 

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