The high level of executive pay has been a hot topic of conversation in the business community for the last few years, with top bosses regularly coming under fire in the media for their exorbitant salaries. Now, legislation made under the Companies Act 2006 will soon see pay ratios of executive’s remuneration to employee salaries revealed through mandatory reporting.
From January 1st, 2019, new regulations will come into force requiring UK companies with over 250 employees to publish the pay gap between their chief executive and their average worker. From this date, employers must identify workers on the 25th, 50th and 75th quartile of pay when comparing employee pay to that of the CEO.
In its Corporate Governance Reform green paper, the government recently commented on the “widespread perception that executive pay has become increasingly disconnected from both the pay of ordinary working people and the underlying long-term performance of companies”, noting it was a contributing factor to public distrust and shareholder dissatisfaction.
The responsibility for creating and publishing the CEO’s remuneration report is likely to fall to finance or HR for most organisations. However, since the new regulation requires pay data for the entire company to be reported on, it may make more sense for businesses to seek external support or bring various functions together to form a dedicated team.
In theory, the concept of reporting on executive pay may seem somewhat straightforward. However, in practice, employers could encounter several problems along the way. For one, the nature of executive pay differs greatly to that of the average employee. With the legal obligation to include bonus payments as well as share-based incentives, the calculation could become complicated and the ratio skewed to a certain degree.
What’s more, companies will also be required by the new regulations to report on full-time-equivalent pay for the UK workforce, which means employers who outsource certain functions or take independent contractors on board may find their final ratio does not paint an accurate picture of the comparison between the highest and lowest paid employees.
The parameters for reporting are now available within the final draft of the legislation.
“From this date, regulations made under the Companies Act 2006 require UK listed companies with more than 250 UK employees to report annually on the pay gap between their chief executive and their average UK worker.”
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CIPD