CEO pay ratios: your essential update

On 1 January 2019, legislation comes into force requiring UK quoted companies with more than 250 employees to publish the pay ratio between their CEO and the “average” employee. Along with the pay ratio, companies must also publish supporting information, including the methodology used to calculate the ratio and the reasons for any changes year-on-year.

CEO pay ratio legislation hasn’t come out of nowhere; it fits into a wider trend of pay transparency and increasing pressure on companies to justify ‘excessive’ executive remuneration. The new laws aim to prompt debate around appropriate levels of executive pay in relation to personal performance and business results. They will also provide an interesting data point during debates around growing inequality in the UK.

Like Gender Pay before it, CEO pay ratio reporting is provoking disquiet up and down the country, as the deadline creeps ever closer. Concerns include:

Getting the maths right – not as easy as you might think, given the complicated methodology options.
Communication – making sure diverse groups of stakeholders, from employees to customers, understand the results and what they say about how pay is managed at the organisation in question.
Scrutiny – if recent coverage of Gender Pay Gap figures is anything to go by, then it seems likely that the media, public figures, and Joe Bloggs will not hold back in criticism of gaps they perceive to be unacceptably high.

These are all valid concerns, but before hitting the panic button, let’s look again at exactly what the legislation requires.

Companies are required to publish the ratio of their CEO’s latest Single Total Figure of Remuneration (STFR) to:

the median (50th percentile) full-time equivalent (FTE) remuneration of the company’s UK employees;
the 25th percentile FTE remuneration of the company’s UK employees;
the 75th percentile FTE remuneration of the company’s UK employees.

To do this the regulations have provided three approaches to calculate the pay ratios:

Option A – determine the FTE total remuneration for all UK employees for the relevant financial year. Of these employees, identify three individuals that are on the above percentiles
Option B – identify three UK employees that are on the above percentiles using the most recent gender pay gap information
Option C – identify three UK employees that are on the above percentiles using relevant data other than or in addition to the most recent gender pay gap information.

In addition to the above, companies must also provide supporting information and explanation as to why the chosen approach was used and reasons for any changes to the ratios year-on-year.

So the reporting requirements are not as involved as those for Gender Pay, but it’s still worth starting early to gather all the relevant information. Executive pay structures tend to be more complex than those lower down the organisation, with base pay, pension, benefits, and incentive plans all in contention.

The results will inevitably have an impact on perceptions of the company. Much like Gender Pay, expect comparisons to be made between competitors, industries and whether the gap changes over time. It’s also worth pointing out that bonus payments and share incentives may skew the data from one year to the next – share values can fluctuate or a long-term incentive plan vests in a certain year.

In summary, there’s no need to panic – but it would be in your company’s best interest to start the process early, even more so if your organisation is complex.

The author is Asha Charles, senior reward analyst at Innecto.

This article was provided by Innecto.