All UK-listed companies with more than 250 employees in the UK will have to report annually on the difference in pay between their chief executive officer (CEO) and their average UK worker, under plans released by the UK government.
The draft Companies (Miscellaneous Reporting) Regulations 2018 are part of a package of reforms which will hold big businesses to account for the salaries they pay. They will require the UK’s biggest firms to justify the pay gap between bosses and their workers.
In addition to the reporting of pay ratios, the new law will also require all large companies to report on how their directors take employee and other stakeholder interests into account; large private companies to report on their responsible business arrangements; and all listed companies to show what effect an increase in share prices will have on executive pay to inform shareholders when voting on long-term incentive plans.
The draft regulations—which, if approved by Parliament, will come into effect from 1 January 2019, with the first pay ratio reports due to appear in 2020—follow concerns that some chief executives have been receiving salaries that are out of step with company performance.
Business secretary Greg Clark says that while most of the UK’s largest companies get their business practices right, the anger of workers and shareholders when bosses’ pay is out of step with company performance is understandable.
“Requiring large companies to publish their pay gaps will build on that reputation by improving transparency and boosting accountability at the highest levels, while helping build a fairer economy that works for everyone.”
Lewis Silkin, a partner at Colin Leckey, says the government has clearly been emboldened by what it sees as the success of the gender pay gap reporting regulations, and hopes to use these new rules as a tool to address public concern over pay inequality.
However, he added: “Compiling the data required for the production of the reports will be another headache for overstretched legal, HR and payroll teams. If the lesson of gender pay gap reporting is anything to go by, this may well turn out to be not as straightforward as the government intends.”
Gillian Maclellan, employment partner with law firm CMS, told Board Agenda that the regulations only cover approximately a third of employers in the UK.
“Even with high levels of compliance, there are huge gaps in terms of coverage,” she said. “We are also not comparing like for like, so while it is one equality measurement tool, it should never be seen as the sole equality measurement tool.”
She added that there is only so much an individual employer can do, since a great deal of the pay gap flows from the “motherhood penalty”. “This involves wider cultural changes around how parents organise childcare, who is the primary carer, the amount of leave taken after birth, rates of part-time working etc.
“So, while there may be a number of steps employers can take to encourage more shared parenting, such as flexible working and offering enhanced shared parental pay, there are wider factors that affect the pay gap that will take time.”