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What is the Executive Pay Ratio Report?

Nov 13, 2018

The requirement for companies with over 250 employees to annually produce a Gender Pay Gap Report came into force this year, with much publicity around its implementation and subsequent results.  The same attention has not been given yet however to the Executive Pay Ratio report, which is due to come into force from 1st January 2019. 

The Companies (Miscellaneous Reporting) Regulations 2018 was published in July this year following parliamentary approval, and requires UK quoted companies with more than 250 employees to publish the ratio between their CEO’s total remuneration and employees’ pay and benefits.  According to CIPD, the average pay ratio between a FTSE 100 CEO and the average worker’s salary was 129:1 in 2016 and 148:1 in 2015.  The aim of the legislation is therefore to provide greater transparency and accountability, calling on companies to justify the difference in pay between their top executives and their average workforce. 

What will be covered in the executive pay ratio report?

The requirement will become law on 1st January 2019 with the first publication of the report depending on the financial year of the company; if the financial year runs from 1st January to 31st December, the first report would cover the financial year ending 31st December 2019.  If the financial year runs from 1st April to 31st March, the first report would cover the financial year ending 31st March 2020.

Within the report, companies must compare employees to the CEO on the 25th, 50th and 75th quartiles of pay.  Pay in the context of this report includes an employee’s full time equivalent pay and benefits.

The CEO’s figure must be the “single figure” total remuneration that the company are already legally obliged to publish in the directors’ remuneration report, including salary, fees, benefits, bonuses, share schemes and pensions.

It is already proposed that this could give rise to certain complications; the structure of a CEO’s pay is naturally different to the average employee; they may be paid through a share structure or bonus payments.  Companies who use a high number of self-employed contractors could also see an inaccurate representation of the figures.

How will the figures be calculated?

In order to identify whether you are required to submit the report based on the number of your employees, i.e. over 250, a company must “find for each month in the financial year the number of persons employed under contracts of service by the company in that month (whether throughout the month or not)”,add together the monthly totals” and “divide by the number of months in the financial year”.   If your listed company is a parent company, the number of UK employees under that group must be included, with the ratio applying to the group.

Companies that meet this requirement have three options to calculate their ratios, and must include in their report why they chose that method:

  • Option 1 – calculate the benefits and pay of all UK employees for the relevant financial year in order to identify the 25th, 50th and 75th quartile.
  • Option 2 – use the most recent hourly rate data already published in the Gender Pay Gap Report to identify three employees who are the most accurate equivalent to the 25th, 50th and 75th quartiles.
  • Option 3 – use data other than, or in addition to, the Gender Pay Gap Report data.  If this option is chosen, the data used must not be less up to date than the Gender Pay Gap Report data, and must not be relating to any year prior to the preceding financial year.

Additional information to include in the Executive Pay Ratio Report

There is a requirement for companies to justify the difference between their CEO and employee pay, with specific mention of the following information:

  • Action that has been taken that year to keep employees informed on matters of concern to them.  
  • Evidence that consultation with employees has taken place on a regular basis on decisions that may affect their interests.
  • Any incentive or share schemes that may encourage employees to engage in the company performance.
  • Evidence that the employees are made aware of the financial and economic factors that impact the company.
  • A review of share price rises, along with the impact this would have on executive pay and long term incentive plans. 

Companies should not only be making preparations in terms of the figures themselves, but also considering the potential effect the results may have regarding their reputation and employee morale.  Employers should be taking a view as to what the ratio could potentially be now, and discussing any PR with your internal communications or marketing teams, as well as considering the supporting comments that will be published in your report to serve as justification.  The Gender Pay Gap Report has this year encouraged employers to take a closer view of their employees’ pay, and not just for those companies required to publish the report.  It is hoped the Executive Pay Ratio report will make employers consider the contribution all of their employees make to the success of the business and make changes accordingly.

If you have questions about the Executive Pay Ratio Report, you can contact Chris or the Employment team on 023 8071 7717 or email chrisgreep@warnergoodman.co.uk.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.