From 1 January 2019, new legislation will require UK quoted companies with more than 250 employees to publish the pay ratio between the CEO and their “average” employee. Mandatory reports will be required from early 2020.
The new rules are part of the Companies (Miscellaneous Reporting) Regulations 2018 and are part of broader changes to corporate management.
According to the Chartered Institute of Personnel and Development (CIPD) and the High Pay Centre, the average pay ratio between a FTSE 100 CEO and the average worker’s salary was 129:1 in 2016. The CIPD estimates that it would take the average UK full-time worker on a salary of £28,000 (median full-time earnings) 160 years to earn what an average FTSE 100 CEO is paid (£4.5 million) in just one year!
Businesses must compare a CEO’s latest Single Total Figure of Remuneration (which companies are already legally obliged to publish in their annual report) with:
· the median (50th percentile) full-time equivalent (FTE) remuneration of the company’s UK employees;
· the 25th percentile FTE remuneration of the company’s UK employees;
· the 75th percentile FTE remuneration of the company’s UK employees.
Figures must include bonuses and any share incentives. Companies must also include the reason for any changes to the figure year-on-year, as well as explaining the methodology they have used to calculate the ratio.
What does it mean for business?
The new regulations are part of a broader move towards pay transparency, which also includes gender pay gap reporting.
As with gender pay gap reporting, businesses are likely to have to examine pay data carefully in order to build the reports they need, and to think through how the results will be communicated both to staff and others outside the company.
There are also likely to be a number of factors that affect how the ratio is calculated. Bonuses and share incentives must be included, for example. This can cause fluctuations year-on-year, particularly if share values increase substantially, or if a share incentive plan vests in a particular year.
Using FTE remuneration might mean that businesses which outsource heavily or have many self-employed staff, might not have a representative figure.
This article is for information only and does not constitute advice.
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