09.07.2018

Changes to the way that biggest firms report bosses’ wages

Changes to the way that biggest firms report bosses’ wages

Major employers across the UK will now be legally required to both publish and justify the pay differences between their chief executives and the average employee for the first time.

The new legislation was approved by parliament early last month, meaning all businesses with more than 250 workers will need to report their “pay ratio” each year, starting in 2020.

 

What is the pay ratio?

The pay ratio is the difference between the top salaries made within a company and the very bottom wages paid. By making top companies publish this information, the government hopes to draw attention to the distribution of pay within businesses and other organisations; making bosses accountable for the salaries they pay.

Wage ratios are calculated by dividing the company’s CEO’s yearly earnings by that of their average employee. These organisations will then be required to explain why their pay ratio is the way it is, and to justify any inequalities in pay distribution it may uncover.

The idea behind the new legislation is nothing new as it was first proposed by Prime Minister Theresa May back in 2016 as part of the government’s plan to encourage “responsible capitalism” across the UK.

It came as a response to concerns that some chief executives have been receiving high salaries that are not in line with the company’s performance; greatly overshadowing the income of employees.

In her speech, the Prime Minister referred to a hypothetical company director “[taking] out massive dividends while knowing that the company pension is about to go bust”; calling for a change that would increase transparency and reduce inequalities within UK businesses.

 

The Industrial Strategy

The pay ratio regulations will stand as a core part of the UK’s Industrial Strategy. This is the government’s plan to create an economy that encourages productivity, and to build on the UK’s reputation as a world-leading place to invest and do business.

As well as enforcing the reporting of pay ratios, the government are implementing a number of other laws as part of their strategy, including: 

  • Requiring all large companies to report on how their directors work in the interests of their stakeholders and staff.
  • Requiring private companies to report on their responsible business arrangements.
  • Requiring listed companies to show what kind of impact an increase on share prices would have on executive pay, and to inform shareholders of this whenever they vote on long-term incentive plans.

Business Secretary Greg Clark said that whilst many employers “get their business practices right… we understand the anger of workers and shareholders when bosses' pay is out of step with company performance.”

He went on to say that the ‘pay ratio’ and these other rules of the new legislation will help to increase accountability for said employers, whilst improving the transparency from the boardroom to the warehouse floor; all building “a fairer economy” overall.

 

More “new rules are needed”

Whilst the government has stressed that the new rules will make businesses more accountable for their pay distribution, the legislation has already received some criticism.

The pay ratio disclosure requirement means businesses must report their figures annually, however, they are not legally required to do anything more than this. Campaigners have raised concerns that the reporting of inequalities will not do anything to tackle the underlying problem.

Frances O'Grady, TUC general secretary, said that the required justification of pay differences between staff and CEOs was a good first step, but that “fat-cat bosses are masters of self-justification and shrugging off public outcry”, and “new rules are needed to make sure they change."

 

What next?

Pay gap reporting between male and female employees was also brought in earlier this year to create more transparency among businesses in the UK. With the pay ratio legislation coming fully into force in 2020, it will be interesting to see what the government will do next.

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