Annual reports reveal what the UK’s top executives earn, but present little evidence to justify their share in success
In response to widespread concern about the gap between CEO pay and pay for the average worker, UK government legislation now requires large listed businesses to report and explain how much their CEOs are paid.
This factsheet gives a brief overview of what the reporting requirements are, who they apply to and what they mean for people professionals.
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What is CEO pay ratio reporting?
From 2020 onwards, the Companies (Miscellaneous Reporting) Regulations 2018 require all publicly listed companies with more than 250 UK employees to publish the ratio between the total remuneration of their CEOs and the full-time equivalent remuneration of UK employees on the 25th, 50th (median) and 75th percentile. In other words, the company must rank its UK employees from highest to lowest paid, identify the 25th, 50th and 75th highest remuneration, then compare this with the remuneration of its CEO. Companies can choose between three options for identifying this data, outlined below.
Importantly, companies must also publish supporting information, known as a ‘narrative’, to explain:
- the reasons for any year-to-year reductions or increases in the ratios
- whether or not the company believes the median ratio is consistent with the organisation’s wider policies on employee pay, reward and progression
- which of the three options they’ve used to calculate their ratio (see below), and why they chose that option.
In addition, all listed companies (not just those with more than 250 people) must explain in their annual reports:
- how future share price increases could affect executive pay outcomes
- any discretion that the remuneration committee has exercised in respect of share price appreciation or depreciation during the relevant performance periods.
To create a strong narrative, employers should:
- describe the relevant organisational context, in terms of what’s going on in the firm as well as what’s happening in the firm’s business environment explain the size of the ratios (why they are what they are)
- explain what actions have been taken, or are planned to be taken, in terms of CEO and employee reward, especially for those towards the bottom end of the pay scale
- describe how stakeholders, such as employees, are being involved in this process
- explain why CEO pay is appropriate relative to the CEO’s performance and the pay of the wider workforce
- explain how executive rewards support the right behaviours and culture in the organisation
- describe how the organisation has engaged with the wider workforce to explain its approach to pay and reward and take on board their views.
When did the requirements come into force?
The requirements came into force in January 2019 and apply to pay awarded in the financial year beginning on or after 1 January 2019. This means annual reports published from 2020 onwards must include this information, but there is no fixed deadline for company reports to be published.
Which companies must comply?
Any company with more than 250 employees must comply with these reporting requirements if they are quoted on one of the following stock exchanges:
- the UK Official List, which includes the FTSE 350
- the New York Stock Exchange
- any other recognised stock exchange in the European Economic Area (EAA).
Companies quoted on the Alternative Investment Market (AIM) do not need to comply.
How must companies calculate the pay ratios?
Companies have three options for calculating their pay ratios:
- Option A: determine the total full-time-equivalent (FTE) remuneration for all the company’s UK employees for the relevant financial year; rank those employees from low to high, based on their total remuneration; identify the employees whose remuneration places them at the 25th, 50th (median) and 75th percentile points.
- Option B: use existing gender pay gap report data to identify the employees at the 25th, 50th and 75th percentile.
- Option C: identify the employees at the 25th, 50th and 75th percentile using other existing pay data.
For comprehensive step-by-step guidance, see the Department of Business, Energy and Industrial Strategy (BEIS) guidance on the regulations.
Which employees should be included in the calculation?
The BEIS guidance lists frequently asked questions and its answers to those queries. It states that “all persons who have a contract of service with the company should be included, regardless of the hours they are contracted to work, other than persons employed to work wholly or mainly outside of the UK. This is unlikely to include persons employed under contract by another organisation, such as an agency or a contractor."
What if there is more than one CEO at the company during the financial year?
The BEIS guidance states: “Where there has been more than one CEO, the company should use the total pay and benefits paid to anyone undertaking the role of CEO in the relevant financial year. For the avoidance of doubt, this should not include pay and benefits receivable by an individual before they assumed the position of CEO (for example, if they were promoted to the role of CEO during the financial year)."
What does ‘total remuneration’ include in the context of pay ratio reporting?
If you choose option A for calculating your pay ratio, then total remuneration includes:
- all salary and fees
- all taxable benefits (gross value)
- any relevant performance-related pay or other assets
- pension-related benefits
- any other remuneration items.
If you choose to base your calculation on gender pay gap data or other existing pay data (option B or C), then total renumeration will already have been determined.
What factors might affect a company’s CEO pay ratio?
Several factors might lead to fluctuations in a company’s pay ratios. These include:
- changes in the CEO’s remuneration
- changes in pay and benefits for the wider workforce
- changes to the company’s employment models
- changes in the way the ratios are calculated.
Where must companies publish the data?
The CEO pay ratio data, and accompanying narrative, must be published in the company’s annual report, as part of the directors’ remuneration report.
What else must companies include in their annual reports?
The Financial Reporting Council’s (FRC) Guidance on the Strategic Report covers everything companies should include in their annual reports. Here we give details of some of the requirements that relate to pay ratio reporting requirements.
Employee and stakeholder and engagement
All firms with more than 250 UK employees (not just publicly listed firms) must include a statement, as part of their directors’ report, summarising how the directors have engaged with employees and taken their views into account when making decisions that impact them. This is known as the section 172 (1) statement and should include decisions about pay.
The BEIS guidance for fulfilling this requirement is not prescriptive. It states: “Companies will need to judge what is appropriate, but the statement should be meaningful and informative for shareholders, shed light on matters that are of strategic importance to the company and be consistent with the size and complexity of the business”.
The FRC guidance goes further, stating that: “While the Act refers to employees, the changing nature of the workplace means that not all people who are working for an entity fall within the legal definition of an employee. Entities are encouraged to broaden their disclosures to consider workforce issues more generally, and not just limit information to those persons who have a contract of employment”. The FRC guidance also includes principles for communication, for instance it should be: “fair, balanced and understandable”, “clear and concise yet comprehensive”, and “reviewed annually to ensure that it continues to meet its purpose and only contains information that is relevant”.
Companies must also report how they have engaged with their other stakeholders, such as customers or suppliers, and taken their views into consideration.
Gender pay gap reporting
Companies with more than 250 UK employees should also include details of their gender pay gap in their annual report. For more information see our gender pay gap reporting factsheet.
What impact will reporting have on employers?
The new reporting requirements will bring additional scrutiny to companies’ pay processes and outcomes. One concern is that reporting for some could become a tick-box exercise, but for well-run organisations, this is an opportunity to demonstrate to investors and other stakeholders that their pay strategy is well aligned with their overall business strategy and considers the interests of all stakeholders – including the workforce.
For employers that don’t already have a robust pay strategy in place, the additional scrutiny could pose a reputational risk. However, by highlighting a potential blind spot in corporate governance that could be putting their long-term success at risk, it also presents an opportunity to strengthen its people strategy.
What is the people profession’s role in CEO pay ratio reporting?
Ultimate responsibility for CEO pay ratio reporting lies with company boards and their remuneration committees. However, the work involved in calculating, presenting and justifying pay ratios is likely to be delegated to various teams (including HR, payroll, finance, communications, and investor relations, for example). HR teams will undoubtedly have an important role to play.
HR teams will be in a unique position to provide much of the data and insights needed to fulfil the reporting requirements, so it makes sense for the chief people officer, HR director or head of reward to take the lead in drawing up a plan outlining who will do what, how and by when. They should also take the lead in preparing supplementary information, such as a Q&A document, to help the organisation address potential questions regarding its approach from its various stakeholders.
Collecting and analysing the data
When it comes to publishing the CEO pay ratio figures, HR teams have an important role to play in ensuring that the right data is collected, in the right way, at the right time and that this information is then analysed and published in the right way. To help, the Department of Business, Energy and Industrial Strategy guidance on the regulations lists frequently asked questions and its answers to those queries.
Promoting your people strategy
CEO pay reporting requirements present an opportunity for HR teams to push their people strategies up the corporate agenda. A good narrative will demonstrate to both internal and external stakeholders how people contribute to the success of the organisation and how the firm manages them, develops them, and rewards their contributions.
Stakeholders (including employees, investors and customers) will also be interested to know how the organisation engages with its workforce, what perspectives it has gathered, and how it is acting on any feedback to maximise the employee experience. For instance, how the firm is responding to employee perceptions and experiences regarding whether or not they are receiving the training and development needed to do their jobs.
Similarly, stakeholders will want to see how the contributions of all employees are being rewarded and recognised and how these are aligned to the purpose and performance of the organisation, as well as what steps the employer is making to get value from the amount it spends on pay and benefits.
Rather than reporting on every aspect of the employment relationship, HR teams should focus on what creates and increases value for their company. This requires that people data is accurate, comprehensive and accessible and that the information is analysed by those with an understanding of people analytics. While reporting on CEO pay data is important, employers have an opportunity to stress what they have done to improve pay progression opportunities for all employees, especially those on low wages.
Managing employee perceptions
Regardless of HR teams’ role in CEO pay ratio reporting, they will have an important role to play in managing employee perceptions of the fairness of pay processes and outcomes. A good narrative will put HR teams on the front foot in this regard, by helping to pre-empt many questions and concerns.
In addition to considering what the narrative should include (see above), HR teams should consider:
- Who is your audience, what are the key bits of information that they will need and want?
- How can you make the language used as accessible as possible?
- How will you test whether your audience understands what has been communicated to them?
- How will you take any feedback onboard?
Ensuring fair pay throughout the organisation
HR teams have a role to play in ensuring that the organisation acts on any insights that the new reporting requirements shine a light on. For example, any changes to the company’s reward strategy that are needed to ensure people throughout the firm’s workforce are paid fairly for their contribution to organisational success.
Useful contacts and further reading
Books and reports
ARMSTRONG, M. (2019) Armstrong's handbook of reward management practice: improving performance through reward. 6th ed. London: Kogan Page.
PERKINS, S.J. (2018) The Routledge companion to reward management. London: Routledge.
PERKINS, S.J. and WHITE, G. (2016) Reward management: alternatives, consequences and contexts. 3rd ed. London: Chartered Institute of Personnel and Development.
Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in print.
GILL, S. (2019) Is your business ready to be transparent about CEO pay?People Management (online). 12 July.
MAXWELL, K. (2019) How will CEO pay gap reporting affect you?People Management (online). 19 March.
CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.
Members and People Management subscribers can see articles on the People Management website.
This factsheet was written by Charles Cotton.
Charles Cotton: Performance and Reward Adviser
Charles directs the CIPD's performance and reward research agenda. He has recently led research into: how employers can help improve their employees’ understanding of their personal finances; how front line managers make and communicate reward decisions to their employees; how employers manage the risks around reward; how private sector employers can build the business case for workplace pensions; how employees form their attitudes to pay; and how the annual pay review process can become more strategic.
He is also responsible for the CIPD’s public policy reward work and has given evidence to select committees on banking pay, redundancy awards as well as responding to various consultations, such as on pensions, retirement and MPs’ expenses.
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