Remuneration committees: CEO pay ratio reporting

Assume brace position: RemCom season is upon us again. And now with added complexity, thanks to recent changes to the UK Corporate Governance Code.

Remuneration committees: CEO pay ratio reporting

After months of consultation, a revised edition of the Code (UKCGC) was published on 16 July 2018, by the Financial Reporting Council (the UK’s independent corporate governance, accounting and audit regulator). The full text can be accessed here. It’s a hefty read. But don’t worry, we’ve done hard work for you.

In a two-part series, we’ll take you through a handy summary of the key changes, primarily as they relate to the operation of a Remuneration Committee. This week, we’re focusing on the introduction of executive (CEO) pay ratio reporting and its implications for the wider business.

From 1 January 2019, UK quoted companies with more than 250 employees will be required to published the pay ratio between their CEO and ‘average’ employees. In addition, they will also have to produce supporting information such as their methodology for calculating the ratio and reasons for any year-on-year changes.

Below are a few key issues reward professionals need to consider before RemComs take place.

Impact on pay decisions

How will this additional reporting impact your current executive pay process? Given this figure needs to be reported in your annual report, how does the timing of that report tally with the timing of when executive pay decisions are usually undertaken in your organisation? Does that need to change?

The benefits of early reporting

Although companies are not required to report the ratio until early 2020 (ie the annual report covering the 2019 financial year), it is worth considering whether to act earlier than this. There are two potential advantages to acting earlier.

1. Positive PR: with gender pay, many companies learned the hard way that media attention was high. I can only assume that the same will apply here. Reporting ahead of the legal deadline will enable you to get on the PR front foot, and even be in a position to take action and compare progress against the previous year, as well as generate an important positive narrative.

2. Understanding skew factors: the exec pay ratio can be skewed by a wide range of factors. Understanding whether these apply to your business sooner rather than later will enable you to prepare appropriate messaging.

Cohesive Messaging

It is important to consider how to align the strategic narrative in support of your gender pay reporting, with the required narrative to explain the executive pay ratio. The need for a cohesive approach may require a change in who takes responsibility for each of these activities going forward, and may require consideration by the Remuneration Committee.

We’ve outlined the full detail of the new pay ratio reporting requirements in another blog. If you haven’t already familiarised yourself with the key aspects, do take a look.

The author is Gemma Bullivant, client director at Innecto Reward Consulting.

This article was provided be Innecto Reward Consulting.

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