Employers have been warned not to treat a new measure to encourage fair pay practices as a “tick-box” exercise and should consider it a chance to help improve employees’ trust in businesses.
The CIPD and thinktank the High Pay Centre said the pay ratio regulations, which came into force on 1 January and apply to UK-listed companies with more than 250 employees, should be treated as an opportunity for organisations to explain their senior executives’ pay levels and showcase what they are doing to ensure pay practices are fair.
CIPD chief executive Peter Cheese said: “This is the first year where businesses are really being held to account on executive pay. Pay ratio reporting will rightly increase scrutiny on pay and reward practices, but reporting the numbers is just the start. We need businesses to step up and justify very high levels of pay for top executives, particularly in relation to how the rest of the workforce is being rewarded.
“Greater fairness and openness in pay is essential in building trust, among employees as well as external stakeholders and investors. Expectations on businesses behaving and acting responsibly are rising, and greater transparency around how they are treating and managing all their people is a vital part of building long-term sustainability.”
The new regulations make it a statutory requirement for the UK’s largest employers to disclose how their chief executives’ pay compares to the median, lower quartile and upper quartile pay of their UK employees. Their annual reports must also include reasons for any year-to-year reductions or increases in ratios, how they have calculated their ratio and whether or not the organisation believes the median ratio is consistent with the organisation’s wider policies on pay, reward and progression.
Business secretary Greg Clark said the regulations would help “give workers a stronger dialogue and voice in the boardroom and [ensure] businesses are accountable for their executive pay”.
Companies must also explain how their directors take employee and other stakeholder interests into account when setting pay scales, while large private sector firms need to report on their corporate governance arrangements.
Organisations’ reports published in 2020 must cover CEO and employee pay awards made in 2019.
However, the CIPD and High Pay Centre want employers to go further than minimum requirements in their reports and would like organisations to question the assumptions that have contributed to excessively high pay, including challenging the value of long-term incentives plans. Businesses should also consider whether remuneration committees are overseeing the provision of fair pay effectively.
The bodies calculated that the average FTSE 100 CEO only needs to work until 5pm today (6 January) to earn the same amount of money a typical full-time employee earns annually – a median salary of £29,559, although this figure is based on what the average employee earned in 2018, according to the Office for National Statistics’ Annual Survey of Hours and Earnings.
The organisations’ estimation is based on the assumption that FTSE 100 CEOs work 320 days a year, work three out of four weekends and typically work 12-hour days, equating to hourly pay of £901.30.
High Pay Centre director Luke Hildyard said: “How major employers distribute pay across different levels of the organisation plays an important role in determining living standards. CEOs are paid extraordinarily highly compared to the wider workforce, helping to make the UK one of the most unequal countries in Europe.
“New reporting requirements mean that publicly listed firms will have to be more transparent over how and why they reward their CEOs relative to the wider workforce. Hopefully this will lead to a more sensible balance between those at the top and everyone else.”