Executive pay ratios for our largest companies were laid before Parliament yesterday. What is behind this move and do they work? Here's a quick summary of what you really need to know:
- Listed companies with over 250 employees will be required to publish their ‘pay ratio’ – this is the ratio between CEO and average worker remuneration. Exact details of the calculation are still to be defined.
- This forms part of new regulations aimed at holding businesses to account - and part of a government strategy to further strengthen the UK’s reputation for good corporate governance and create a world-class place to do business.
- If approved, the regulations will take effect from 1 January 2019 - and so we will start to see pay ratios published in 2020. It is likely to affect around 900 companies.
- Ratios are one of a number of proposals affecting pay in the proposed regulations – including a requirement to show how employee and other stakeholder views have been accounted for, and how an increase in share price will affect executive incentive plans.
- Pay ratios are on the horizon for private companies too - a review led by James Wates will publish recommendations later this week. This proposed voluntary code for large private companies is likely to include pay ratios, and will be subject to a consultation period.
- There are arguments for high executive pay – as the world of work changes, top jobs become bigger and more complex and we need to be competitive when competing in the talent market. When exceptional leaders drive successful business, the welfare of our whole society benefits (see our article).
- But the amounts are seen to be excessive, and the link to company performance questionable – despite executive pay dropping by a fifth this year, 4 Jan 2018 marked ‘Fat Cat Thursday’. Calculated by the High Pay Centre, it’s the day FTSE100 CEOs will have earnt more than the average salary of £28,758. Business Secretary Greg Clark talks of “the anger of workers and shareholders when bosses’ pay is out of step with company performance’. The Gini Index is a measure of income distribution and the UK wealth inequality is at a similar high level to the US.
- There’s good reason to aim for fair and proportionate pay gaps - there is a correlation between the pay gap and likely conflict, employee turnover, work-related illness and therefore productivity (HPC). Also, societies with smaller income inequality are generally happier, healthier, and a better place to live for everyone.
- Pay ratios are a blunt tool but admirable first step - the figures will almost certainly mislead, incite unhelpful comparisons across companies and sectors, and provide bait for provocative media coverage. However, like gender pay reporting, it shines a spotlight on an important issue which encourages a useful debate at senior levels, and more dialogue between workers and boards.
- We may be surprised by the results when published – despite significant delays due to concerns around the calculations, the US have implemented pay ratios under the Dodd Frank reform bill. The first comprehensive study of results have produced some shocking findings. “I knew inequality was a great problem in our society but I didn’t understand quite how extreme it was” (Keith Ellison, congressman)
Let’s learn our lessons from gender pay: do the calculations early (even if the guidelines aren’t available yet), embrace the intent even if you’re are not a listed company, talk with the board about what represents fair and proportionate pay for workers at all levels, agree what ratio is right for your company and create your action plan.
As with gender pay reporting, when it comes to publication carefully explaining the context, and adding authentic narrative, really will be key. We’ve talked previously of how the value-add is in the detail and the debate, not the headline figures.
I do get the feeling that ‘anger’ around executive pay is more severe than gender pay. And so the fallout from publication could be harsher.
Image courtesy of Garry Knight