EXECUTIVE PAY | Mind the Gap

Hot on the heels of gender pay reporting, large companies will also have to comply with executive pay reporting.

For the first time, the government has decided that listed companies will be required to publish the pay difference between chief executives and their workers each year. These new rules will come into effect on 1 January 2019 and will apply on the financial years which begin on or after this date. The first reports will be due in 2020.

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What is the reason behind the new rules?

This government’s legislation comes after a barrage of criticism in the last few years from workers, shareholders, customers and the media about the huge disparity in pay between the average FTSE chief executive and the average UK worker in that company. The fact that chief executives are being paid salaries which are out of sync with the company’s performance has also become a contentious issue.

Who do the new rules apply to?

Executive pay reporting applies to all quoted companies with more than 250 UK employees. 

They must be quoted on the UK Official List, NASDAQ, the New York Stock Exchange or a recognised stock exchange in the European Economic Area (EEA). 

When working out whether the company has more than 250 employees, anyone who has a contract of service should be counted except those who work mainly or entirely outside of the UK. 

However, the government states it is “unlikely to include persons employed under contract by another organisation, such as an agency or a contractor”. 

Details regarding this can be found in the government guidance on pages 14 to 23, here.

What are companies required to do?

As part of their directors’ remuneration report, companies will need to publish the ratio between the CEO’s total annual remuneration to the median remuneration of full- time equivalent UK employees, as well as to the 25th percentile remuneration of the company’s UK employees and 75th percentile remuneration of the company’s UK employees.

There are three possible ways to calculate the ratios. Companies will need to explain the methodology they used to determine the ratios and any changes to the ratios from previous years and the reasons for these trends. Again, details can be found in the government’s guidance, here.

Apart from reporting pay ratios, what else do companies have to do?

As part of their directors’ report, companies must outline how they have engaged with employees and considered their interests.

They will also need to report on how directors take the interests of both stakeholders and employees into consideration. They will need to reveal their reasonable business arrangements and show what impact an increase in share pay has on executive pay and use this to notify shareholders when casting their votes on long-term incentive plans. 

How can companies prepare?

January 2019 is coming around quickly, but in preparation for the new rules, you should:

  • Identify all the relevant employees for reporting purposes;
  • Assign someone or a team to take responsibility with these new rules; and
  • Take time to read through the government guidance and understand exactly what is required.

The government has issued a useful Q&A document, which can be found here

Since this is a corporate governance issue, essentially governed by the reporting provisions contained in the Companies Act 2006, it is important that separate corporate advice is taken in respect of these incoming rules.

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