Executive pay ratio reporting: what do you need to know?

news article

Sep 4 2018

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The last two years have seen a myriad of new rules, regulations and legislative expectations added to the requirements of UK businesses, and this summer has been no different. Following several years of government consideration around the issue of executive pay and ‘corporate irresponsibility,’ they have recently announced new legislation, requiring employers to publish their pay ratios, highlight the pay gap between CEO and employee remuneration, and other key employee engagement information.

The new regulations aim to be part of a package of reforms, which will hold big businesses to account for the salaries they pay across their structural hierarchies.

What is Executive Pay Reporting? 

In a nutshell, executive pay ratio reporting will apply to quoted companies that are already required to produce a directors’ report, and/or those with an average of more than 250 employees during the relevant financial year.

Why is it required? 

Despite an ongoing trend of falling levels of CEO pay, the actual pay gap between company figureheads and the average employee remains shockingly vast. According to the CIPD and the High Pay Centre, the ratio between CEO pay and average worker pay stood at 129:1 in 2016 – 20 years ago, this ratio was just 45:1.

With business investors placing CEO’s under increased scrutiny as they demand value for money, and workers and campaigners pushing for both fair wages and improvements in corporate social responsibility, it is no wonder that the government have decided to apply strict legislation to the issue.

How will the legislation work?

Businesses will need to identify employees on the 25th, 50th and 75th quartile of pay when comparing employees’ pay to that of their CEO. The CEO’s figure must be the ‘single figure’ total remuneration that eligible companies are already legally obliged to publish in their annual directors report.

Businesses are also able to use three potential calculation methodologies when reporting on the results – one of which involves using reporting data for gender pay gap requirements. When setting out their figures, companies must also state which reporting option they have chosen, and why.

What else will need to be included?

Alongside the main reporting requirement, under the new legislation eligible companies will need to also include information on:

  • How company directors take employee and other stakeholder interests into account
  • How they manage and implement ‘responsible business arrangements’
  • Demonstrate any effects that an increase in share prices has on executive pay, and how this information is used to inform shareholders when voting on long-term incentive plans

When will it come into force? 

The regulations will not officially come into force until next year, but we have included a timeline of key dates that you should be aware of:

  • 19th July 2018 – Final version of Companies (Miscellaneous Reporting) Regulations 2018 published, following parliamentary approval.
  • 1st January 2019 – Regulations will come into force, with the new requirements applying to reporting on all financial years starting on or after this date
  • Early 2020 – The first companies are expected to publish mandatory executive pay ratio reports

Are there any problems with it? 

One issue that businesses could encounter lies with the way in which CEO’s are paid, as remuneration is made up of a number of different elements. Any obligation to include bonus payments and share-based incentives could further complicate calculations, particularly if share value increases or long-term investments mature.

Companies will also be required to report on FTE pay for their staff, so those that may have a high-ratio of self-employed contractors could show a ratio that is not necessarily a true depiction of the comparison between highest and lowest paid.

Will it affect company reputations? 

As we have already seen with gender pay gap reporting, companies reporting smaller ratios that show a reduction over time will inevitably be seen as ‘fairer’ than others reporting bigger ratios. The main issue that many businesses will face is presenting the ratio to internal staff, and explaining the story behind it.

Having a robust PR strategy pre-prepared should help to mitigate any harsh critics, and including as much supporting commentary as possible to explain ratios and figures within the required reports should also go a long way towards presenting a more positive public image.

What can businesses do now to prepare? 

Viewing the final version of the bill, and reporting parameters required, would be a good start for companies looking to start planning their approach. It may also be prudent to understand how your own ratio could be perceived by employees and the public alike, and to start analysis sooner rather than later.

Ensure that all key stakeholders within your business understand the roles that they must play in this process, and ensure that your relevant marketing and/or PR personnel are on board to deal with any negative feedback or criticisms.


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