Rationalising pay

25 September 2018

This article was featured in the October 2018 issue of the magazine.

Helen Hargreaves MSc ChFCIPPdip, CIPP associate director of policy and membership, sets out details of new reporting requirements

With differences in pay between the genders continually hitting the headlines, it is perhaps surprising that another example of pay inequality receives far less attention. But on 17 July 2018, going largely unreported, the Companies (Miscellaneous Reporting) Regulations 2018 were made which require listed companies with more than 250 employees to report their chief executive officer (CEO)/worker ratios along with other employee engagement information. 

Recent research carried out by the Chartered Institute of Personnel and Development alongside thinktank the High Pay Centre, discovered that the ratio of median FTSE 100 CEO pay to median UK full- or part-time worker pay had increased in 2017 to 167:1, up from 153:1 in 2016. In simple terms this means that an average worker must work for 167 years to earn the average annual pay of a FTSE 100 leader. A quite staggering difference, and one of the drivers behind the introduction of pay ratio reporting which comes into force in January 2019 with reporting expected to start in 2020.

...addressing corporate excesses and short-term thinking...

The government has brought in this requirement as part of a package of measures which it hopes will build on the strengths of the existing UK corporate governance framework to ensure that the UK remains an attractive place in which to do business. The reform package is specifically targeted at addressing corporate excesses and short-term thinking which go against the interests of shareholders and stakeholders, such as the employees of companies, and that undermine trust in business in general. 

This legislation is part of the government’s wider work aiming to enhance public trust in business as a force for good, with the following stated aims: 

  • incentivise stronger stakeholder engagement, sustainability and long-termism

  • help reduce the risk of future governance failures, improve transparency and restore trust in business

  • greater transparency to shareholders and others on how share price changes affect executive remuneration, and

  •  incentivising company boards and senior management to think more about pay dispersion within their companies and how pay is shared across the wider workforce.

The key requirements for payroll practitioners are all listed companies with more than 250 employees in their group must include in the directors’ remuneration report various detailed information, including: 

  • using one of three optional methodologies (A, B or C), calculate the pay ratios between the CEO and average employee remuneration. The table must include the median pay ratio, the 25th percentile pay ratio, the 50th percentage pay ratio and the 75th percentile pay ratio. Under options B and C, the company calculates these figures using the data collected for gender pay gap reporting purposes

  • an explanation of the reason for the chosen methodology and the methodology applied

  • an explanation for any year-on-year increases or decreases in the ratios and the reasons for any trends, and

  • whether the company believes that the median CEO/average employee pay ratio is consistent with its pay, reward and recognition policies for all UK employees.

Though the regulations give companies a choice of which option to use, the government is of the view that option A provides the most statistically accurate method for identifying the pay ratios and companies should use this option wherever possible and reasonable. Hence the requirement to explain why they have chosen to use option A, B or C.

In addition, these companies must include in their annual report what action they have taken to improve employee engagement and consultation – including how directors have engaged with employees, and how the directors have considered their employees’ interests.

Though in many organisations, responsibility for reporting these figures will fall to the human resources (HR) department, it is the payroll department which once again holds the necessary information. And as we learnt from gender pay gap reporting, these new rules will bring with them further onerous obligations on companies to collate, analyse and present this information positively and consistently. 

While the legislation requires a reasonably large amount of information to be provided, it is likely that investor, employee and public focus will be primarily on the single CEO pay ratio figure and there will undoubtedly be media headlines made by some of the results. To mitigate this, it is vital that joined-up discussions start early between payroll and other departments within the company such as HR, finance and communications colleagues to consider the best and most positive way of presenting the figures. 

The Department for Business, Energy and Industrial Strategy has produced a document which provides more information https://goo.gl/xDyRRF and the CIPP’s policy team will keep you informed as we get closer to the implementation date.