The High Pay Centre has urged boards to explain how they will use the information gathered for pay ratio reports and renewed calls for legislation to introduce workers on boards.
Researchers from the think tank looked at disclosures from 201 companies on pay ratios, which found that median FTSE 100 ratio for chief executive to the lowest paid, or lower quartile, workers in 2019-20 is 109:1. For the FTSE 350 the figure is 71:1.
The study also identified the companies with the biggest pay disparities. Ocado, an outlier, revealed a ratio of 2,605:1 for the CEO to median employee. Though that is extreme, other companies disclosed big numbers too. JD Sports’ ratio is 310:1 and Tesco 305:1. AstraZeneca, currently involved in Covid vaccine production, has a ratio of 190:1.
Retail emerged as the sector with the biggest pay difference with a ratio of 140:1, while financial services, largely due to lower numbers of highly paid workers, had a ratio of 35:1.
Pay ratio reports and corporate governance
Aiming to improve the lot of low and middle income earners, the High Pay Centre made a number of recommendations, many of which would represent significant changes to current corporate governance.
Though the current governance codes suggests workers on boards as one of three options to represent employees inside boardrooms, the High Pay Centre suggests the government turn to legislation to mandate a staff member sitting alongside executives and non-executives. “This would allow workers to play a meaningful part in the governance process and would provide a voice at the highest level of the company making the argument for more even pay distribution,” it says.
Proposals for improved reporting include statements about the use of pay data by boards. The High Pay Centre found few companies offered detailed narratives about what would happen now they had information to hand.
There is also a proposal to create a fresh duty for directors to run companies using “balanced judgments of the long-term interest of all stakeholders” to encourage directors to think more about pay distribution.
The were also calls for shareholders to have binding votes on remuneration reports and the inclusion of “guidance” on potential future pay ratio sizes.
In a significant departure from current practices, the High Pay Centre also proposes companies provide information on pay ratios directly to employees.
Low-paid outsourced workers
Though the ratios seem stark, there were warnings that they may in fact flatter many companies because the calculations fail to include the pay of outsourced workers, usually on lower wages than staffers.
Of course, the report highlights the issue of executive pay levels, an old debate in corporate governance circles. But it also underlined the relatively poor pay levels for workers in some sectors, such as retail. According to Paul Lee, a former head of corporate governance at Aberdeen Asset Management speaking at the launch of the report: “It’s clear that the ratios are driven much less by pay at the top… but actually by pay at the bottom.”
To confront the issue of using low-paid outsourced workers, Lee says companies should disclose much more about the way their business models depend on outsourcing, rather than try to add their pay into ratio calculations.
That idea came from Sandy Pepper, a professor at the London School of Economics and an expert on executive pay, who also says that pay ratios, as currently calculated, are “deeply flawed” because outsourced workers are excluded. Sectors with relatively healthy-looking ratios, like financial services, should therefore “not be let off the hook”.
“It is quite clear that intra-company inequality, that is inequality within corporations, is part of the societal problem of inequality and I have no doubt that that is an important issue that society ought to be addressing,” says Pepper.
The High Pay Centre report contains much to digest, not least data on which companies might find it easier to redistribute pay from highly paid workers to lower earners. Investors, as Paul Lee observes, increasingly focus on the “S” (social) in ESG. Pay, especially at the lower end of the scale, could move to the engagement agenda.