Labor to introduce a CEO-Worker pay ratio if elected
05/10/2018
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The Federal Opposition has announced the adoption of a CEO-worker pay ratio as formal policy leading into the next election.

All listed companies with over 250 employees would be required to report the ratio of CEO pay to the pay of the median employee from the 2021 financial year. This appears similar to the US disclosure law under Dodd Frank (see HERE), rather than the UK method, which relies on a comparison to the the 25th percentile, median and 75th percentile employee pay (see HERE). We would expect that despite the method cited in the announcement, the end result will end up more like the UK method than the US method.

The implementation period is intended to allow the Australian Securities and Investments Commission time to issue appropriate guidance, and for firms to comply with the new requirements.

Realistically, at least this period of time will be required. As we have seen from implementations in the US and the UK, deciding which subsets of employees to include or exclude within the subset of a “worker” is not necessarily a given (overseas or purely Australian, only full-time permanent or part-time and casual workers), as is the definition of “pay” (fixed remuneration, total maximum or opportunity, realised pay, statutory values, include one-off payments or exclude etc).

If Labor is elected and this policy is implemented, any ensuing ratios will need to be interpreted with care. The median worker in a financial services organisation is unlikely to earn the same amount as the median worker in a retail organisation. Some may claim that the the ratio can, however, be useful if compared over time or between operationally similar peer companies.

According to Guerdon Associates GECN Network partner Farient Advisers (see HERE), the implementation in the US has shown the consumer discretionary sector to have the highest CEO to median worker pay ratio, followed by Consumer Staples. The energy, utilities and real estate sectors have the lowest ratios.

Shadow Assistant Treasurer Andrew Leigh pointed to pay increases highlighted in the ACSI’s annual ASX200 CEO pay report (see HERE) as the impetus for the policy announcement.

“This policy addresses public concern that CEO salaries are growing at an unfair rate and leaving workers behind. By extending current market reporting requirements for public companies, it will help inform investors as they calculate risks and decide where to invest their money,” Mr Leigh states in his release.

Publication of pay ratios can be used to justify agendas on both sides of politics. The left can use it to justify more progressive taxation, pay caps, and increases to minimum wages. The right can use it to justify economic policies for better worker productivity to afford increases in average worker pay. It is unlikely it will result in economic policies from either side that would result in higher levels of employment (in fact, probably the other way).

Alongside their pay ratio, firms would be encouraged to provide a public explanation of the remuneration strategy. Our sister US company, Farient Advisers, said in its analysis that US companies vary broadly in their disclosures – some have provided a number with no explanation, while others have offered detailed explanations (See some interesting industry differences HERE).

Labor’s announcement can be found in full HERE.

© Guerdon Associates 2021
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