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High chief executive pay will require ‘appropriate disclosures’

Listed companies must be prepared to appropriately explain the difference between chief executive and average worker pay ahead of the introduction of new pay ratio reporting requirements, an expert has said.17 Aug 2018

The High Pay Centre think tank and Chartered Institute of Personnel and Development (CIPD) are calling for large companies to introduce pay ratio reporting immediately, ahead of new regulations, due to come into force next year. FTSE 100 chief executive salaries increased by an average of 11% last year, compared to a 2% increase amongst the wider workforce, according to the bodies’ annual survey of executive pay (34-page / 2.2MB PDF).

Companies should also provide clearer information about executive pay and wider pay distribution within the workforce, and consider whether their remuneration reports can be shortened and simplified to make them easier to scrutinise, the authors of the report said. They also recommended that remuneration committees and shareholders place stronger emphasis on ensuring that chief executive pay is properly aligned with wider pay practices at the organisation.

Executive remuneration expert Suzannah Crookes of Pinsent Masons, the law firm behind Out-Law.com, said that investors would “largely echo” the recommendation to publish pay ratios in advance of the mandatory deadline. UK listed companies with more than 250 employees will be required to publish the ratio of chief executive pay to average worker pay for financial years beginning in 2020, and will also have to report on how their directors take employee and other stakeholder interests into account.

“Early disclosure of pay ratios is something which the Investment Association, for example, has been encouraging,” said Crookes. “More companies may be prepared to take this forward now that the basis for what the disclosures will require has been published. The recommendation around the importance of an appropriate narrative to set such disclosures in context is helpful, as companies and their stakeholders will need to understand the implications of the published ratios beyond the mere numbers themselves.”

“The survey refers to the package of corporate governance reforms introduced over the last 12 months. Though it concludes that these have not yet resulted in significant downward pressure on executive pay, it will be interesting to see how this position evolves once all of the relevant reforms are fully in force. Whilst some reforms are not solely focussed on executive pay, the wider package of measures around increased employee engagement and reporting are all likely to have an impact on the overall position,” she said.

FTSE 100 chief executive median pay increased from £3.53 million in 2016 to £3.93 million in 2017, according to the High Pay Centre/CIPD report. The report chose to lead with the median, rather than the mean, figure, as the figures were otherwise skewed by two very large 2017 payouts of £47.1m and £42.8m.

The mean pay ratio between FTSE 100 chief executives and the workplace average was 145:1, up from 128:1 in 2016, according to the analysis.

Just seven current FTSE chief executives are women according to the report, which noted that there had been only one new female chief executive each year since 2015. These seven female chief executives earned just 3.5% of total chief executive pay tracked by the report.

“Much commentary about the first gender pay gap reports has, rightly, noted that a lack of women in senior roles has contributed to the pay gap in many organisations,” said Suzannah Crookes. “However, this survey also notes that, even within senior roles, there is an overall gap between the different organisations included of around 64%, based on median figures.”