Pay Ratios Disclosure Regulations

August 29, 2018


Which companies do the pay ratio requirements apply to?
Quoted companies (not AIM companies) with >250 UK employees (average no. over the financial year). This includes all UK employees who have a contract of service with the company, regardless of hours worked, although it is the FTE pay figure that is used.
The draft regulations provide a ‘smoothing provision’ in paragraph 19B which provides for a two-year time lag before a company either drops out of, or is covered again, by the pay ratio disclosure requirement.

What are companies required to do?
Report in tabular form within their annual Directors’ Remuneration Report the ratio of their CEO’s latest Single Total Figure Remuneration to the 25th, 50th and 75th percentile of the company’s UK employees’ FTE remuneration.
Underneath the ratios table, companies must provide some supporting information and an explanation, including:
• the methodology chosen for calculating the ratios;
• the reason(s) for any changes to the ratios compared to the previous year;
• in the case of the median ratio, whether, and if so why, the company believes this ratio is consistent with the company’s wider policies on employee pay, reward and progression.

How many years of pay ratio reporting should be included in the table?
Going forward, the pay ratios table should cover a ten-year reporting period. The disclosure will build in the table incrementally to a ten-year period, with only one set of ratios therefore being disclosed in the first year of disclosure.

The three methods/options for calculating the pay ratio
The three options (A, B or C) essentially boil down to where the company gets their data from; collect it specifically for this purpose, use of gender pay gap data or use of other pre-existing data.

Option A

1. Calculate (on a day no earlier than three months before the end of the relevant financial year) the pay and benefits for every UK employee for the relevant financial year;
2. Identify the employees whose pay and benefits places them at the 25th, 50th and 75th percentiles;
3. Compare to the CEO to obtain the ratios.

Option B (use of gender pay gap information)

1. Use the most recent gender pay gap information to identify three UK employees whose remuneration place them at the 25th, 50th and 75th percentiles.
2. Calculate these employees’ pay and benefits for the relevant financial year;
3. Make any necessary adjustments to the pay and benefits identified in step 2 (e.g. if an employee identified using gender pay gap information receives an atypical variable pay in the relevant financial year);
4. Compare to the CEO to obtain the ratios.

Option C (use of other pre-existing pay data)

1. Use pre-existing pay information for UK employees as an alternative to, or in combination with, gender pay gap information.

More detailed information can be found in The Companies (Miscellaneous Reporting) Regulations 2018 – FAQ: https://www.gov.uk/government/publications/corporate-governance-new-reporting-regulations

Or contact harry.mccreddie@mm-k.com for further information

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