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Executive Salaries to be Published Under New Pay Gap Reporting Laws

Executive Salaries to be Published Under New Pay Gap Reporting Laws

Pay gap reporting laws

Companies will be forced to disclose the salaries of their chief executives under new laws, as parliament introduces a raft of measures to promote pay transparency and hold firms to account for excessive wage gaps.

Starting in 2020, UK-listed companies with over 250 employees will be required to disclose the gap in earnings between their chief executive and an average employee in a new, annual ‘pay ratio’ report.

Further, businesses will have to inform shareholders of the effects that any potential share price increase would have on executives’ salaries ahead of voting on long term incentive plans. The measures follow last year’s corporate governance reforms, which sought to make corporate board members more accountable to shareholders.

Pursuant to those proposals, the Financial Reporting Council is producing a revised, simplified Corporate Governance Code for public companies, with a heavier emphasis on empowering employees and stakeholders, expected in 2019.

In addition to pay gap reporting, employers will be under a duty to prove that they are implementing “responsible business arrangements” and taking employee and stakeholder interests into account in their decisions.

Wide pay ratio gaps reflect “broken system of executive pay”

CIPD chief executive Peter Cheese says the reforms will be a “welcome step in addressing” what he terms “the UK’s broken system of executive pay.”

Research from the CIPD and the High Pay Centre indicates that the average pay ratio of a FTSE 100 chief executive to an average worker was 129:1 in 2016, down from 148:1 in 2015. It would take the average worker earning £28,000 per year 160 years to earn the £4.5m that the average CEO at a FTSE 100 firm earns in just one year.

“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,” Mr Cheese said.

The measures mirror those recently introduced to combat gender pay inequality, with companies now obliged to produce gender pay gap reports every year.

Employers completed the first cycle of gender pay gap reporting in April 2018 to mixed results, and several companies have since announced significant internal reforms – such as bans on all-male interview panels and shortlists – to ensure improvements in their results next year.

Business Secretary Greg Clark says that:

“most of the UK’s largest companies get their business practices right,” but adds that he “understand[s] the anger of workers and shareholders when bosses’ pay is out of step with company performance.”

Campaigners welcome “first step” in starting “dialogue” on fairer pay

The new laws have drawn support from many corners – with pay equality campaigners, business associations and investor bodies all in favour.

Luke Hildyard, director of the High Pay Centre, a think-tank, is hopeful that the measures “will initiate a more informed debate about what represents fair, proportionate pay for workers at all levels.”

Meanwhile, CEO Chris Cummings of the Investment Association trade body says investors will benefit from greater transparency surrounding executive pay.

“Investors will expect boards to articulate why the ratio is right for the company and how directors are fulfilling their duties,” he said.

A spokesperson for the Confederation of British Industry stated that the legislation would “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.”

However, the Trades Union Congress (TUC) says more still needs to be done, calling the newly announced measures a “first step.”

In a joint letter with several charities and think tanks, the TUC stated that “transparency alone is not enough” to restore balance in company pay scales.

Campaigners recommend further changes to company law, obliging company directors to “promote the long-term success of the company as their primary duty,” in order to avoid reckless fiscal risks and market volatility.

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