For the first time, UK listed companies with more than 250 employees will have to disclose and explain their top executive’s pay and the gap between that and their average worker.
Pay ratio regulations will make it a statutory requirement to reveal annually the ratio of their CEO’s pay to the median, lower quartile and upper quartile pay of their UK employees. Companies will start reporting this in 2020 (covering CEO and employee pay awarded in 2019).
In addition, businesses will also be required to report on how their directors take employee and other stakeholder interests into account, as well as requiring large private companies to report on their corporate governance arrangements.
“The regulations coming into force today will build on our reputation by increasing transparency and boosting accountability at the highest level – giving workers a stronger dialogue and voice in the boardroom and ensuring businesses are accountable for their executive pay” said Business Secretary Greg Clark.
“These new regulations are a key part of the wider package of corporate governance upgrades we are bringing forward as a government to help build a stronger, fairer economy that works for businesses and workers.”
The reforms follow support and calls from investors and shareholders for companies to do more to explain how pay in the boardroom aligns with wider company pay and reward. The new regulations will hold businesses to account for excessive salaries, while recent changes to the corporate governance code give employees a greater voice in the boardroom.
Furthermore, alongside pay ratio reporting will be a new statutory duty to set out the impact of share price growth on executive pay outcomes. The aim is to provide greater clarity about the impact share price growth has on executive pay outcomes and whether discretion has been exercised before pay awards are finalised.
The roll-out of this legislation coincides with the launch of a new report, RemCo reform: Governing successful organisations that benefit everyone, from the CIPD and High Pay Centre on the problem of rising executive pay and the need to reform remuneration committees.
It comes on the back of Fat Cat Friday, when a FTSE 100 CEO earning the average pay packet of £3.9 million earns the equivalent of an average full-time worker’s annual salary in just the first three working days of the year.