Corporate Governance Reforms – CEO Pay Ratio Disclosure

19
Dec

In 2016 Theresa May announced the Government’s intention of requiring companies to disclose the ratio of CEO pay to that of employees.  The intention has now become a reality and first disclosures will become mandatory for Financial Years which commence on or after 1st January 2019.

The new Rules can be found in the Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/806), which amend the current directors’ remuneration report requirements.   Going forward, new disclosures will form part of companies’ Remuneration Reports in the Annual Report on pay.

The Rules are far from straightforward, but in summary, the ratios of total CEO pay must be calculated against the 25th, median, and 75th percentile of UK employees’ pay.  Companies may choose one of three methods of calculating employees’ pay, named Options A, B and C.  Further guidance on the options is available from the Department for Business Energy and Industrial Strategy. 

The ratios must be disclosed in a prescribed table, building up to a ten-year period, and this period must include previous years in which the companies were outside scope for reporting. Beyond ten years it is unnecessary to disclose pay ratios, but companies can opt to do so if they wish.

To complicate matters further, there is a prescribed narrative which companies must follow in order to explain their figures.

Good news for smaller companies

These regulations only apply to UK incorporated companies, whose shares are quoted on the main list of the London Stock Exchange, New York Stock Exchange, NASDAQ or a recognized Stock Exchange in the European Economic area, and who have more than 250 UK employees.  Consequently, the majority of UK companies will be exempt from the new regime, as is AIM.

It is a matter for the individual company to determine whether they should include zero hours workers, agency workers and contractors when calculating whether they have over 250 UK employees or not.  It is important to ensure companies apply general employment law principles when making these decisions.

Summary

It has been recommended that companies should consider a dry run for the Financial Year which commenced in 2018 but ends in 2019, to ensure the appropriate mechanisms for disclosure are in place.

Whether these new regulations have the desired effect of promoting fairness in matters of pay is entirely another matter.   Since 2013, companies have been obligated to disclose percentage changes in CEO pay and group employees’ pay, but it is fair to say that transparency has often been lacking.  What is clear is that these reforms are a further burden on companies, which they will have to start planning for in the very near future.

If you have a query relating to this article, or require further advice on other aspects of HR or employment law, Head of Dispute Resolution, Jonathan Moreland (jmm@swinburnemaddison.co.uk) or Sharney Randhawa (shr@swinburnemaddison.co.uk), or call us on 0191 384 2441.

View All Articles >