From the start of 2020, organisations with more than 250 UK employees are legally required to disclose their CEO pay ratios. Paul Holcroft of Croner explains what companies need to know about executive pay ratio reporting.

What is executive pay ratio reporting?

From 1 January 2020, quoted organisations with more than 250 UK employees are legally required to disclose their executive pay ratios. Briefly, this means that eligible companies will need to specify their Chief Executive Officer’s most recent total remuneration figure as a ratio against the 25th, 50th and 75th percentiles of full-time equivalent remuneration of employees.

This data should be placed within the company’s annual directors’ remuneration report and needs to include figures from its most recent financial year that started after 1 January 2019. In addition to this, employers must put together supporting information to help explain how the ratios were calculated and why the data displays what it does.  

Why has the government implemented executive pay reporting?

As a further move towards pay transparency, the government hopes that this disclosure, and the required disclosure of supporting and explanatory information, will allow interested parties inside, and outside of, the organisation to understand how remuneration policies across the organisation compare to the executive pay policy.

The government continues to focus on transparency as a method of creating change, as shown through introducing mandatory gender pay gap reporting and considering mandatory ethnicity pay gap reporting.

Could executive pay ratio reporting affect my company’s reputation?

Generally, management tends to earn more money than other company employees. Provided employers ensure compliance with the national minimum wage, they are free to pay their staff how they please. However, displaying a significant discrepancy between CEO and employee earnings could result in a poor external reputation for the company overall, potentially deterring both potential future candidates and clients from coming to the business.

There are also internal issues to think about. Employees who do not feel like they are adequately paid are more likely to be become demotivated, disillusioned and, ultimately, consider leaving their job for alternative employment. This could also lead to ongoing issues between management and their staff, particularly if director salaries continue to go up while employee wages remain stagnant.

It should be remembered that the production of these reports is a legal requirement that falls within the Corporate Governance Code. Failure to disclose CEO pay ratios, the required information or the explanatory information will be deemed an offence.

About the author

Paul Holcroft is an associate director at Croner, a consultancy for HR, health and safety and reward.

See also

Company information search

Five upcoming employment law changes your company needs to be aware of in 2020

TUPE: an overview of what businesses need to know

Find out more

New executive pay transparency measures come into force (Gov.uk)

UK Corporate Governance Code (FRC)

Image: Getty Images

Publication date: 9 January 2020