Corporate Governance Reform – CEO pay ratios
21 August 2018
The Companies (Miscellaneous Reporting) Regulations 2018 have been laid in Parliament which will require listed companies with more than 250 employees to report their CEO/worker ratios along with other employee engagement information.
The Regulations are due to come into force on 1 January 2019 with CEO pay ratio reporting expected to start in 2020.
Companies within scope must report in tabular form within their annual Directors’ Remuneration Report the ratio of their Chief Executive Officer’s latest Single Total Figure of Remuneration (STFR) to:
- the median (i.e. 50th percentile) full-time equivalent (FTE) remuneration of the company’s UK employees;
- the 25th percentile FTE remuneration of the company’s UK employees;
- the 75th percentile FTE remuneration of the company’s UK employees.
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.
Analysis shows that:
- A company’s ratio is partly predicted by the number of employees: larger companies have higher ratios – they are less equal.
- Differences in ratios between companies are also explained by the type of industry they are in – not just by company size. Some industries employ much higher proportions of highly-skilled, well-paid employees (e.g. finance), while others, like retailers, have large numbers of relatively less well paid staff. The remuneration of chief executives also varies across industries.
- When looking at individual companies, ratios can fluctuate a lot from year to year. These fluctuations are due to the high volatility of top CEO pay, while pay in the wider workforce is more stable.
The Department for Business, Energy and Industrial Strategy has produced a FAQ document which provides further information, including:
- How a company should determine whether it has more than 250 UK employees
- If agency staff, contractors and staff on zero hours contracts count towards the total
- What about individual contractors or consultants who have a personal contract with the company
- What if a company’s headcount varies from year to year above or below 250 UK employees
- What if there is more than one CEO at the company during the financial year
- What pay ratio methodology should companies use