With effect from January 2019, UK Corporate Governance reforms required that certain large listed companies report on the ratio of what they pay their chief executive compared to the average rate of pay of their employees, if the ratio is 120:1 or higher. The first reports are expected to be published in 2020.
Legal requirement to report pay gap
Certain listed UK companies must now begin collecting data so that they may meet the new legal requirement to report on the pay gap between their chief executive and their average UK worker. Reporting came into force on the 1st January 2019 and therefore the first ever reports are due to be published in 2020.
The ‘quoted’ companies with more than 250 UK employees must publish, as part of their directors’ remuneration report, the ratio of their CEO’s total remuneration to the median (50th), 25th and 75th percentile full-time equivalent (FTE) remuneration of their UK employees.
Employee pay, reward and progression
Alongside this, the companies must publish supporting information, including the reasons for changes to the ratios from year to year and, in the case of the median ratio, whether, and if so how, the company believes this ratio is consistent with the company’s wider policies on employee pay, reward and progression.’
Employee wages and salary must as a minimum be used for the pay ratio calculation. The following other pay and benefit components should also be used, where applicable (i.e. where such pay and benefits have been awarded), calculated in the same way as the CEO’s remuneration is calculated for the purpose of reporting:
- Taxable benefits
- Annual bonus
- Share based or other remuneration from performance or other incentive plans over multiple years
- Pension benefits.
“Quoted” refers to companies as defined by the Companies Act 2006. This means UK incorporated companies who are quoted on the UK Official List, the New York Stock Exchange, NASDAQ or a recognised stock exchange in the European Economic Area. It does not include companies listed on the Alternative Investment Market.
Who is affected?
The Corporate Governance Code requires:
- Around 900 listed companies to annually publish and justify the pay ratio between CEOs and their average UK worker
- All companies of a significant size to publicly explain how their directors take employees’ and shareholders’ interests into account
- All large companies to make their responsible business arrangements public.
‘Comply or explain’
Under the Code’s ‘comply or explain’ basis, firms would have to either:
- Assign a non-executive director to represent employees
- Create an employee advisory council
- Or nominate a director from the workforce.
Additionally, the government is to develop a voluntary set of corporate governance principles for large private companies to work to.
This will not apply to businesses who are not constituted as companies (e.g. Limited Liability Partnerships). It will apply to England, Wales and Scotland and it may apply to Northern Ireland by agreement.
- There is a Q & A on the The Companies (Miscellaneous Reporting) Regulations 2018 available from the BEIS (Department for Business Energy and Industrial Strategy).
- Read the article on Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 to find out about the companies regulations which were brought into force on the 10th June 2019. They implement parts of Directives relating to the encouragement of long-term shareholder engagement.