Who needs to follow the UK pay ratio regulations? All UK listed companies that employ more than 250 staff need to comply.
When do the first statutory disclosures begin? Large size companies must provide the information from the beginning of the year 2020.
What do the pay ratio disclosures force companies to do? They must:
- Justify the amount paid to top bosses (e.g. executives).
- Account for how CEO salaries relate to the wider pay of employees.
What is the biggest significance of the new executive pay transparency measures? The new regulations force the biggest companies in the United Kingdom to disclose and explain the pay reward given to their top bosses.
In fact, it is the first time large UK companies MUST justify the gap between CEO salaries and the wages of their average worker.
CEO Pay Ratio Regulations
The new executive pay ratio regulations are now a statutory annual requirement. Thus, companies must file their reports starting from 2020 onward.
Note: The initial statutory requirement covers CEO and employee pay awarded during the 2019 financial year.
But wait… there’s more:
Besides the reporting of pay ratios, the new executive pay transparency measures also require:
- All large size companies to report on how their company directors take employee and other stakeholder interests into account.
- Large private companies to file a report on their corporate governance arrangements.
The government claims the reforms were part of their action to upgrade corporate governance and the business environment. The aim is to ensure the United Kingdom remains as a world leader as a place to invest, to grow a business, and to work.
So, why has the government brought in the new reforms? It follows calls from investors and from shareholders.
They wanted companies to do more and provide explanations on how boardroom pay aligns with wider company rewards.
Closer scrutiny exposes the purpose behind the new pay ratios regulations. Yes, it will hold the largest businesses in Britain to account for excessive salaries. But, the changes to the corporate governance code will also provide a greater voice for employees in the boardroom.
The Business Secretary for the United Kingdom said:
- Britain’s reputation as one of the most dependable and best places in the world to do business, work, and invest is well-deserved. The vast majority of the biggest companies in the country act responsibly, and apply good business practices.
- The department for Business, Energy and Industrial Strategy (BEIS) understands the frustration shared by workers and by shareholders. Concerns about executive pay being out of step with performance are valid.
- UK pay ratio regulations increase transparency and boost accountability at the highest level. It gives workers a stronger voice in the boardroom which ensures businesses are accountable for their executive pay.
- The new regulations are one key part of a wider package of corporate governance upgrades. The government is helping to build a stronger, fairer economy. They want one that works for businesses and the workforce.
The government also plans to introduce a new statutory duty on companies. The main aim is to set out the impact of share price growth on executive pay outcomes.
It will provide greater clarity on the impact that significant share price growth has on executive pay outcomes. It should show whether discretion was exercised before the finalisation of pay awards.
Corporate governance upgrades form a key part of the UK’s Industrial Strategy. It is a long term plan to build a Britain that is fit for the future through a stronger and fairer economy.