The Government has released its long awaited Corporate Governance Reforms which would detail how much chief executives are paid in comparison to the average worker
The Government’s proposals on executive have finally been released to a mixed reception. Companies with less than 80% approval pay will now be entered on a public register, while this information has always been readily available, the register will now also record what companies will do to address shareholder concerns.
Paul Griffin, partner in the employment team at Norton Rose Fulbright commented:
“The long awaited package of proposed reforms imposes increasing reporting obligations on companies. If companies are required to include details of the total remuneration of their chief executive, they must start to consider how such information will be published and their internal and external communications to avoid damaging the company’s reputation from any misleading comparisons between different industry sectors. It will be interesting to see if the increased reporting obligations will have the result of “pushing down” executive pay or whether it will result in increased competition between companies to retain their key executives.”
Companies of a significant size, whether private or public, will have the statutory requirement to publish pay ratios, however, this only needs to include UK employees. This may lead to arbitrary results, as limiting the comparison to UK employees may have a perverse result for companies with mostly non-UK employees. The other issue also lies with companies that employ fewer low paid workers or outsource low paid workers, will appear to have a lower and reasonable ratio. Companies will also be required to explain the changes to their pay ration each year and how it relates to pay and conditions across the workforce, the emerging patterns would be useful.
Another consideration that has to be made involves how companies will calculate their ratio.
Alexandra Beidas, partner at Linklaters LLP adds:
“The devil will be in the detail of how the CEO: employee pay ratio will be calculated. The government will consult on methodology and on the option of reporting ratios by pay quartile. So there is still a risk that we could end up with a number of methods - extinguishing any chance of realistic comparisons between companies in the same sector. The US rules on pay ratio disclosure show that methodologies can be complex, and potentially may be manipulated. The US rules allow companies to choose how to identify the median employee, for example using a statistical sampling of employees (rather than an annual survey of the entire workforce). They also allow companies to choose the date of comparison, within three months of the end of its financial year (so companies can exclude low paid seasonal workers) and to exclude non-US employees of up to 5% of the workforce. It will be important for the UK rules to avoid too much of this flexibility, to avoid robbing the disclosure of much of its intended usefulness.”
“As expected, many of the measures – such as designating a non-executive director to represent workers, establishing an advisory council that would have access to board members, or appointing individual ‘director from the workforce’ – will be part of the Corporate Governance Code. If so, will companies comply? They may choose to explain instead why such requirements are not suitable for their businesses, but in the present climate, it would be tricky just to ignore these Code provisions. Companies may end up having to come up with more bespoke measures, for example, to take into account employees’ views on pay. This may end up having some positive outcomes.”
“At first glance, the expected changes will place further pressure on remuneration committees to consult with shareholders. Companies will not want the embarrassment of appearing on a public register designed to name and shame those with a significant vote against pay. But remuneration committees are already very focused on significant votes against due to the bad press such votes receive, so the register may turn out to be a gimmick which does not go any further to solving the perceived problem.'