Executive Pay Reporting and Ratios – three things for all businesses to consider in 2021

January 25, 2021

January has started to become the time when the pay of executive directors (and in particular the pay of the CEO/Managing Director) comes into sharp focus.  Having waded through the initial headlines, the early signs about 2021 are that (probably unsurprisingly, given the economic conditions) CEO pay has broadly remained flat.

As a result of this, pay ratios are likely to remain at or near the levels we have seen for the last few years (although the impact for businesses which have had to furlough employees will be interesting to consider).  However, the requirement for some businesses to start reporting their pay ratios is likely to mean that this will continue to be a hot topic of conversation throughout 2021.

To kick the year off, here are three important thoughts for your business.

  1. Do I have to report something?

Currently, the reporting requirement applies to large UK incorporated companies (meaning those with over 250 employees) who are listed on “main exchanges” (such as the London Stock Exchange or the NYSE).  Importantly, it does not apply (for the moment) to large companies quoted on AIM.

  1. Why would it benefit me to do this calculation, even if I do not need to report the findings?

One obvious benefit is that if you happen to be in an organisation with a much lower CEO pay ratio than the market average, then there is likely to be positive reporting that can be made from this piece of data.

Alternatively, if the exercise is done to analyse pay ratios over a number of years, it can give the business an idea as to whether the way in which the CEO/executives are being paid is moving in line with growth (or otherwise) in the business.  This information can be valuable as part of a wider remuneration review exercise.

  1. How else should I use (or not use) this data?

One situation that needs to be managed carefully is where a difference in pay ratios between companies is used as a basis to highlight a perceived issue with pay levels within an organisation.

We would always urge caution in such situations, as there may be cultural, as well as structural, reasons why pay ratios differ between organisations.  There is no “correct” ratio.  Like all pieces of benchmarking information, it should be used to inform and guide – but never define – a company’s remuneration policy for executives.

If you would like further information about the points raised in this article or would like assistance with undertaking a pay ratio exercise, please do contact Stuart James.

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