UK CEO pay in the spotlight as new law takes effect

With purposeful work, good business and sustainability again a talking point, the latest High Pay Day figures from the CIPD make interesting reading.

Image of UK currency and small figures sitting on piles of coins
The latest figures resonate even more strongly this year given it is the first time that, under changes to the Companies Act (2006), limited companies employing more than 250 people must publish the pay ratio between CEOs and the average worker in their 2020 annual report.Companies must also offer a supporting narrative to explain their ratios, with employer bodies calling on business leaders not to treat the new reporting requirements as a "box-ticking exercise."

Who earns what?

Calculated with input independent think tank the High Pay Centre, the professional body for HR and people development’s headline analysis reveals that UK CEOs earn 117 times the annual pay of the average worker.In 2018 (latest available data) the average FTSE 100 CEO earned £3.46 million, which is equivalent to £901.30 an hour.By comparison, the average (as defined by the median) full-time worker took home an annual salary of £29,559 in 2018, equivalent to £14.37 an hour.Based on these figures, the CIPD calculates that to match average worker pay in 2020, FTSE 100 CEOs starting work on Thursday 2 January 2020 only need to work until just before 17.00 on Monday 6 January just three working days (33 hours) into the new year.

Trust and high pay

Peter Cheese, chief executive at the CIPD, which is supporting HR professionals to embed concepts of Good Work, including fairness, into workplaces, 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, amongst 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.”  

Linking CEO pay to national living standards

Luke Hildyard, director of the High Pay Centre, added: “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.”

What are the new reporting requirements on CEO pay?

Under the new pay ratio regulations, it is now a statutory requirement for UK listed companies with more than 250 employees to annually disclose the ratio of their CEO’s pay to the median, lower quartile and upper quartile pay of their UK employees. Plus:
  • the reasons for any year-to-year reductions or increases in the ratios
  • whether or not the company believes the median ratio is consistent with the organisation’s wider policies on employee pay, reward and progression
  • how they have calculated their ratio and why that method was chosen

What can businesses do about the new reporting requirement for CEO pay?

To ensure the new requirements are treated as more than a compliance exercise, the CIPD and High Pay Centre are also emphasising the importance of firms complying fully with their wider reporting obligations under the UK Corporate Governance Code, including:  
  • Why executive director remuneration is appropriate relative to their organisation’s strategy and the long-term performance of the company
  • Why executive remuneration is appropriate, using internal and external measures including pay ratios and pay gaps across the company
  • What engagement has taken place with employees to explain how executive remuneration aligns with the pay of the wider workforce.
When creating the narrative, and considering executive pay moving forward, the CIPD and High Pay Centre want businesses to question the assumptions that have contributed to excessively high pay.These include challenging the value of long-term incentives plans (LTIPs), whether the CEO’s pay packet is delivering good value for money and whether remuneration committees are effectively overseeing fair pay up and down the workforce.

For more HR news and features, see our Human Resources section. 

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