Legislation will force firms to disclose pay ratios as ‘Fat Cat Thursday’ highlights exec reward

4 Jan 2018 By Emily Burt

Government confirms plans for mandatory reporting by listed companies, with overall CEO-to-worker ratio at 120:1

Organisations must prepare to disclose their pay ratios in the coming months, experts have warned, as ‘Fat Cat Thursday’ today (4 January) marks the point by which the UK’s biggest-earning bosses have been paid more than the amount the average full-time worker will make during the whole of 2018.

Calculations published by the CIPD and the High Pay Centre suggest that pay for leading chief executives will pass the median UK gross annual salary of £28,758 for full-time employees by the end of the day, just three days into the working year.

The mean average FTSE 100 CEO pay packet fell by a fifth during 2016, compared to the previous 12 months – from £5.4m to £4.5m – but the ratio of CEO pay to the wage of the average full-time worker still stands at 120:1.

“The gap in pay between the top and the average worker in FTSE 100 companies cannot be justified – as recently as 20 years ago, that gap was about a third of what it is today,” Stefan Stern, director of the High Pay Centre, told People Management.

“The job of CEO has not got so much harder, nor have corporate results got so much better, that such a rise in top pay was inevitable. The top pay system is broken,” he said.

“This is not the fault of any one element in the system, but it means that many aspects must change how they operate: boards, shareholders, pay consultants, headhunters and the CEOs themselves.

“The government has provided a new framework, with compulsory pay ratio publication, for this to happen. Businesses must act and, if they have any sense, they will.”

The government committed to rebuilding public trust in business with a series of corporate governance reforms, announced in August 2017. Business secretary Greg Clark promised to introduce new laws to force roughly 900 listed companies to publish and justify pay ratios between CEOs and workers. The Department for Business, Energy and Industrial Strategy told People Management that this would be drafted into legislation “before the summer recess”.

“To ensure this year’s fall in CEO remuneration isn’t just a blip on the consistently upward trend of recent years, it’s crucial that the government keeps high pay and corporate governance reform high on its agenda,” said Peter Cheese, chief executive of the CIPD.

“We also need business, shareholders and remuneration committees to do their part and challenge excessive pay, to understand pay and reward for top executives in the context of the whole organisation, and to look at how pay is linked to driving sustainable performance. We need a significant rethink on how and why we reward CEOs, taking into account a much more balanced scorecard of success beyond financial outcomes.”

TUC senior policy officer Janet Williamson, however, said pay ratio reporting alone would not be enough to drive change in organisational behaviour – or improve workplace fairness around pay.

“Reporting on pay ratios will provide useful information and put a focus on the gaps between the average members of the workforce and those at the top of a company, but it will take people acting on that information to effect change,” she said.

In the past there has been much emphasis in policy proposals on executive pay disclosure, “but these have not proved successful to date in reducing executive pay”, Williamson told People Management.

“Other measures, alongside pay ratio reporting, are equally important in promoting workplace fairness – such as appointing workers to remuneration committees, and introducing broader changes to the structure of executive pay.

“[The TUC] would welcome a much simpler structure with a greater emphasis on salary, and a lesser emphasis on performance elements, which are unpredictable and difficult to control.” Rewarding employees should be a top priority – research has proved that treating your workforce well results in lower sickness and absence rates, she said.

A global workforce study from Willis Towers Watson published in October 2017 found that only a third of employees saw a clear link between their pay and performance, as wage increases remained largely stagnant throughout 2017. Only 40 per cent felt their managers made fair decisions linking performance to pay, while fewer than half said their organisation clearly explained its reward programmes.

Katherine Chapman, director of the Living Wage Foundation, told People Management that FTSE 100 companies should strive to narrow the ratio between executive and standard pay packets by committing to a real living wage in 2018.

“More than a third of FTSE 100 companies have already signed up to pay the real living wage. These businesses are putting fairness and decency at the heart of their organisations, and have had a huge impact on the lives of low-income workers,” she said.

“They have also recognised the many business benefits of paying a wage based on the cost of living, including reduced turnover and greater staff morale. In 2018, it will therefore be increasingly important that more top businesses follow suit and commit to paying a fair day’s wage for a hard day’s work.”

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