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Pay ratios could lift the fog of unfairness

29 September 2017 by Paul McFarlane

Pay ratios could lift the fog of unfairness - Read more

Proposals to reveal the disparity in pay between CEOs and workers are unlikely to end a febrile debate.

At the start of her premiership, Theresa May said: ‘The government I lead will be driven not by the interests of the privileged few, but by yours.’ Now her administration is seeking to force large public companies to publish pay ratios.

Executive pay has been a contentious issue for years, despite increasing government efforts to address it. In 2013, the coalition government introduced measures to give shareholders greater control and oversight of executive pay.

Likewise, in its November 2016 green paper on corporate governance reform, the government put forward the option of introducing pay ratios, requiring companies to compare chief executive pay to that of its average UK worker.

This would enable shareholders, employees and the wider public to judge how company pay differentials compare across different organisations, particularly those within the same sector. 

The green paper noted that advocates for pay ratios believed they would increase executive pay transparency. Boards would be required to explain to shareholders why the ratio is appropriate given the performance of the business and rewards for the general workforce.

“Detractors said pay ratios would merely be a new reporting obligation which adds little of value in helping to set appropriate pay levels”

Meanwhile its detractors, including ICSA, said pay ratios would merely be a new reporting obligation which adds little of value in helping to set appropriate pay levels. A simple ratio of CEO pay to the median salary in the company could produce misleading figures, which could be misunderstood or misconstrued in public discourse. 

The Business, Energy and Industrial Strategy (BEIS) Select Committee report (April 2017) recommended introducing pay ratios between the CEO and executive team, and the CEO and median worker. However, it accepted that such ratios ‘need to be treated and interpreted with caution’.

On the political front, the Labour Party’s 2017 manifesto included a statement that: ‘We will expect suppliers [to local and national government] to reduce boardroom pay excesses by moving towards a 20:1 gap between the highest and the lowest.’

The Conservative and Liberal Democrat manifestos were silent on this subject.

Lifting the veil

Following the full green paper consultation, in August the government announced it will require all listed companies 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, and setting the ratio in the context of pay and conditions across the wider workforce
  • Provide a clearer explanation in remuneration policies of a range of potential outcomes from complex, share-based incentive schemes.

The government also said it will invite the Financial Reporting Council (FRC) to revise the UK Corporate Governance Code to: ‘Give remuneration committees a broader responsibility for overseeing pay and incentives across their company and require them to engage with the wider workforce to explain how executive remuneration aligns with wider company pay policy (using pay ratios to help explain the approach where appropriate).’

In response, CBI president Paul Drechsler said: ‘If pay ratios include meaningful context they could prove a useful addition to the debate about executive pay.’

This contrasted with Alex Collinson, Trades Union Congress policy and campaigns support officer, who said: ‘If we really want to help those on the lowest pay, it seems to make more sense to make companies [reveal] the pay ratio between the chief executive and lowest paid, rather than the average.’

The government has said that it intends to bring its reforms into effect by June 2018, to apply to company reporting years commencing on or after that date. Ahead of this, they will consult on secondary legislation necessary to implement these reforms.

Comparing notes

Until lately, pay has been shrouded in secrecy, employers relying on the duty of confidentiality as the legal basis for not revealing individual pay packages.

One can contrast the UK’s secretive pay culture with Norway, where no-one can disguise their earnings. There every citizen’s tax return is made available online so that everyone else can see what you earn.

However, since 2014, if someone other than the press asks Norway’s tax authority for details of your salary you will be sent an email telling you who has been checking. Since this rule came in, the number of requests has fallen considerably.

“In Norway every citizen’s tax return is made available online so that everyone else can see what you earn”

In the UK, regulations put in place in 2015 require local authorities and public bodies to provide greater pay transparency by publishing the number of employees whose pay is at least £50,000 in brackets of £5,000; details of pay and job titles of ‘senior employees’ whose salary is at least £50,000; and the names of employees whose salaries are £150,000 or more.

The BBC was also recently required to disclose the salaries of its top presenters. This resulted in much public disquiet about differences in pay between male and female presenters. The BBC’s list also showed the lack of representation of black and minority ethnic and disabled presenters at the top.

In its August report ‘Tackling gender, disability and equality pay gaps – progress review’, the Equality and Human Rights Commission found that women, black and minority ethnic people, and those with disabilities continue to be paid less compared with their white, male and non-disabled counterparts.

Mandatory gender pay gap reporting for private sector and voluntary sector employers with 250 or more staff came into force in April 2017. The government has also consulted on introducing such measures for public sector employers.

Meanwhile the equalities commission has recommended that such reporting be extended so that employers are required to report on pay gaps for their disabled and BAME staff.

Moving forward

Calls for more pay transparency will likely continue, at least as long as significant disparities persist.

It will be interesting to see whether the introduction of pay ratio reporting will have any effect on this issue. Furthermore, the direction of travel suggests that pay gap reporting could be extended to cover ethnicity and disability. 

What about complete pay transparency? Speaking to The Guardian last year, Marius Bakke at the Norwegian embassy in London said that tax transparency may contribute to a flatter and more equal pay structure in Norway.

But perhaps that would be a cultural shift too far.

Paul McFarlane is an employment partner at Weightmans

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