Corporate Governance Reform – CEO pay ratios

24 April 2018

Government announced nine reforms to corporate governance that it wants to bring into effect by June 2018; one of which is for public companies listed on the stock exchange to report annually the ratio of CEO pay to the average pay of their UK workforce, along with a narrative explaining changes to that ratio from year to year.

Pay ratios

To give an example, a ratio of 50 means that the CEO is paid 50 times the average pay in the company. A Parliamentary briefing calculates pay ratios in the UK based on available data for 319 companies (most of the FTSE 350). In 2016, the average ratio between CEO pay and average employee pay was 57. The highest ratio was as high as 826 at WPP PLC (a world leader in advertising and marketing services), and as low as 2 at IP Group PLC (a group that partners with universities to build tech businesses based on intellectual property).

The 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

Taken together, company size, industry and the volatility of CEO pay can largely explain a company’s ratio and changes from year to year. It is expected that these factors will feature heavily in the narrative that companies will be required to provide along with their ratios.

Ratios in the briefing were calculated by taking CEO pay and dividing it by average employee pay. CEO pay is the ‘single figure’ total remuneration of CEOs, which includes salary, benefits, pension, bonus and long-term incentives, whether in cash, kind or shares. Average employee pay was calculated by taking total employee costs and dividing by total employee numbers. Total employee costs is not just wages and salaries, but also includes pensions, social security and other remuneration such as bonuses. These items (except social security) are included in CEO pay figures, so are also included in the ratio’s denominator.

 

CIPP comment

As stated in the government's response to the Corporate Governance Reform consultation, the intention is to bring the reforms into effect by June 2018 to apply to the company reporting years commencing on or after that date.

Business secretary Greg Clark promised to introduce new laws to force roughly 900 listed companies to publish and justify pay ratios between CEOs and workers. The Department for Business, Energy and Industrial Strategy told People Management that this would be drafted into legislation “before the summer recess”.