CEO Pay Ratio reporting: introduction, implementation and predicted impact
The “CEO pay ratio” has become a hot topic after the introduction of new legislation demanding UK incorporated companies listed on the FTSE, NYSE and NASDAQ with over 250 employees to disclose in their directors’ remuneration reports the ratio of their CEO’s total pay to the lower quartile, median and upper quartile total pay of their UK employees. This central issue was discussed at the seminar “Working 9 to 5. What will pay gap reporting mean? Will it change anything?” organised by the High Pay Centre on 19 February 2019. Expert opinion was provided by speakers from different organisations: Tom Gosling (PwC), Alun Humphrey (NatCen Social Research), Deborah Hargeaves (High Pay Centre), Euan Stirling (Standard Life), Janet Williamson (TUC), Charles Cotton (CIPD).
“We are welcoming pay ratio disclosures … they highlight pay inequality. It has been a decade of stagnation for average employees” – stated Janet Williamson, a Senior Policy Officer in the TUC’s Economic and Social Affairs Department. Excessive pay for senior executives and the widening gap between CEO and average employee remuneration has attracted public attention. For instance, in 2017, a £110 million long-term incentive award to Persimmon’s Chief Executive sparked a wave of criticism and generated intense public debate. According to Euan Stirling, an investment director from Standard Life: “Persimmon highlights that something is wrong at both ends of the spectrum, especially at the higher end. We should think about long-term sustainability of the organisations”.
The Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860) require disclosures to show a comparison of CEO’s total pay to other UK employees’ earnings at the 75th, 50th and 25th percentile. However, it seems that there is a number of obstacles in the way to calculating the ratios. As Charles Cotton observed, it is “not easy to get the data for reporting … it requires companies to invest into HRIS1”. On the other hand, “companies need to get over the initial hurdle of publication” – emphasised Euan Stirling.
Tom Gosling, a Partner and the head of PwC’s UK Reward Practice, acknowledged that there is a significant difference between the pay ratio and Gender Pay Gap reporting, as “Gender Pay Gap gets into heart of the issue and provides new information to the world, while the pay ratio is not a new piece of data coming out … The new pay ratio reporting is expected to shame companies. But a more productive way is to review the pay at the bottom”. According to Tom Gosling: “By far the most impact on the fair pay principles was the change2 to the UK Corporate Governance Code. It encourages more behaviour change than the pay ratio”.
Undoubtedly, transparency over CEOs’ total remuneration relative to average employee pay should be encouraged. However, a company’s narrative about pay distribution and remuneration principles (who should be rewarded what and why) is more important than a box-ticking exercise on CEO pay ratios.
For further information about the issues raised in this article or to discuss any questions you may have, please contact Natalie Cherkas.
1HRIS or a human resources information system is a form of human resources software that combines a number of systems and processes to ensure the easy management of human resources, business processes and data;
2Refers to the 2018 UK Corporate Governance Code, particularly to the Remuneration Section (e.g. Provision 38 states that “The pension contribution rates for executive directors, or payments in lieu, should be aligned with those available to the workforce”)