The difference between executive pay and average employees will have to be justified under new regulations.
The government has announced a package of reforms which will hold big businesses to account for the salaries they pay, with listed companies having to annually publish and justify the pay difference between their chief executive and staff.
All UK listed companies with more than 250 UK employees will have to disclose their pay ratios every year. Directors of all large companies will also have to set out how they are acting in the interests of employees and shareholders. The measures have been introduced following concerns that some executives are receiving salaries that are out of step with company performance.
Business Secretary Greg Clark believes that one of the UK’s biggest assets is its reputation for being a dependable and confident place to do business.
“Most of the UK’s largest companies get their business practices right but we understand the anger of workers and shareholders when bosses’ pay is out of step with company performance.
“Requiring large companies to publish their pay gaps will build on that reputation by improving transparency and boosting accountability at the highest levels, while helping build a fairer economy that works for everyone,” he said.
The new corporate governance laws, which were set before Parliament earlier this week, form part of the government’s Industrial Strategy which aims to make sure the biggest companies are more transparent and accountable to their employees and shareholders.
In addition to the reporting of pay ratios, the new laws will also require large private companies to report on their responsible business arrangements and, for listed companies to show what effect an increase in share prices will have on executive pay to inform shareholders when voting on long-term incentive plans.
Chief UK Policy Director of the Confederation of British Industry (CBI), Matthew Fell, said: “The CBI is clear that high pay is only ever justified by outstanding performance. High pay for mediocre or poor performance is unacceptable.
“This legislation can help to develop 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.
“Ratio comparisons between sectors and firms will be as meaningless as comparing apples and oranges. What’s most important is that all businesses make progress towards fair and proportionate pay outcomes,” he said.
Subject to Parliamentary approval, the regulations will come into effect from 1 January 2019 meaning that companies will start reporting their pay ratios in 2020.
The government has published an FAQ document to help employers prepare for the new corporate governance regulations.
