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  • Luuk Jacobs
    Luuk Jacobs

    The next Pay Gap is coming – here’s what it means

    With the dust on the Gender Pay Gap Reporting just settling down, and clearly a lot of work to be done as a result, the UK is bracing itself for the next legislation around Pay Gaps. This time around it’s the turn of the CEO. UK listed companies must publish and justify the Pay Gap between Chief Executives and their staff from 2020 and explain how future share price rises will affect executive pay.

     

    In 2018, corporate America already made public a data point it would probably rather keep under wraps: how much CEOs make in comparison to their (global) employees.

     

    Pay Ratio Reporting will force UK listed companies with over 250 employees to reveal and “justify” the difference between how much top executives are paid compared with the average pay of their UK workforce (and in that it is different from the US where companies have to disclose their “Pay Ratios,” or the CEO’s compensation divided by the (global) median employee’s).

    Companies will also have to publish a narrative explaining changes to the pay ratio from year to year and to set the ratio into context of pay and conditions across the workforce.

     

    Subject to Parliamentary approval, this will come into effect from 1 January 2019, and companies will have to start reporting their Pay Ratios in 2020.

     

    What is the objective?

    One may ask what the exact objective of this law is. Has it been created as a tool to name and shame individuals and companies, or is it about reaching ratio that is considered to be reasonable? There are other questions as well.

    What will the justification of the ratio really mean, and how and who is to challenge it; is this the employee, the shareholder or even the government?

     

    What factors are to be taken into account to define what reasonable is?

    Of course, with all change there is risk. One could easily argue executive roles come with intrinsic high risk themselves; that of succeeding at the task. Being offered a remuneration package not reflecting this due to keeping in line with a certain (median) executive versus staff remuneration ratio, would potentially drive the best candidates away.

     

    Is it a rush to the average?

    Some data shows 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 (CIPD estimates). The Equality Trust runs a very clever Pay Ratio tracker if you don’t believe me. Does this mean a ratio of 160 is the benchmark against which “reasonable” is measured? Is there room to be specific to company circumstances even if the public eye might say ‘but the average is 160’? Not currently as there seems to be no definition and no rationale either.

     

    James Jarvis, Corporate Governance Analyst at the Institute of Directors, said: “Ratios are a pretty blunt tool, which will generate plenty of heat but not necessarily much light on the issue of executive pay.”

     

    The role of the AGM

    In today’s world the Executive remuneration proposals are (or at least should already) be scrutinised every year through the AGM. Recent high profile cases where shareholders refused to approve the executive remuneration proposal (at the AGM of Persimmonin April 2018) or there was at least a rebellion against pay reports (AGM SHELLin May 2018) are a case in point.

     

    The role of the Board

    Following the recent Carillion scandal, ‘the board’ is in the spotlight which has led the IoD to call for tightening the rules around executive roles, responsibilities, and bonuses. This debate will rage on with strong arguments for and against.

     

    We are left without answers so far. With ‘the board’ already having the responsibility to review and challenge the right executive pay, is bringing the Pay Ratio a good move? It may appear in the public domain but is it really indicating the Board is not doing its job properly if there is no accepted mean or average?

     

    On the upside, this legislation may help bring about a better dialogue between boards and employees about the goals and aspirations of their business, and how pay is determined to achieve this shared vision.

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