On 11^th June 2018 the UK government released draft legislation proposing new reporting requirements on executive pay (see HERE).  Listed companies with more than 250 employees must disclose their CEO to the 25th percentile, median and 75th percentile employee pay ratios and explain the pay difference in the context of the company’s strategy.

The legislation is the government’s implementation of its recommendations (see HERE) resulting from a 2016 consultation into the corporate governance of UK companies (see HERE).

According to the government’s statements,  the requirements aim to:

• Improve transparency
• Boost accountability at the highest levels
• Restore the public’s trust in big business
• Create a more equal and fair society

The regulations will come into effect on 1 January 2019, meaning companies will start reporting their pay ratios in 2020 as part of the directors’ remuneration report.  Companies will have to report pay ratio information comparing the CEO’s ‘single figure’ total remuneration with the 25th, 50th and 75th percentile of full time equivalent remuneration of the company’s UK employees. For a parent company, the information must relate to the group.

Data will build incrementally to a ten-year period going forward (i.e. for the first year there will be only one set of pay ratios).  Companies will be required to explain the reasons for changes to the ratio year on year and whether the company believes the pay ratios are consistent with the company’s wider policies on employee pay, reward and progression.

US companies reported their first pay ratio disclosures this year as required by 2015 rules (See HERE) implementing the Dodd Frank Wall Street Reforms resulting from the financial crisis. The UK pay ratio differs to the US ratio in key ways, one being that US companies must include all employees and not just US-based employees (except in certain circumstances).

Farient Advisers, a member of the GECN network, has released a Pay Ratio Tracker that provides insight into US pay ratios over different industries (see HERE).

GA Comment:

This move will spotlight what executives are being paid compared to their workforce, but there may be issues explaining large variations due to incentive pay. This may especially the case where investors consider company performance based on a different metric to those on which the incentive is based.

Since all industries are different, hiring workers on varying wages depending on the skill set required (think retail versus financial services) the real comparability of this ratio will be low. The only true use will be to compare the ratio with prior ratios for the company or industry and even that will have its complexities, as mentioned above.

There have been concerns regarding the administrative burden of the calculation of the quartile pay ratios, although companies have the option to utilise existing pay data such as gender pay data (see HERE).  With this method, companies can identify, on an indicative basis, three UK employees at median, 25th and 75th percentiles, rather than ranking all employee data.

 

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