Pay ratio reporting for listed firms

Listed companies with 250+ employees face the prospect of having to publish – and justify – pay ratios between their CEOs and staff.

This move forms part of the government’s drive to improve corporate governance and other measures include:

  • all large companies reporting on how their directors take employee and other stakeholder interests into account
  • all large private companies reporting on their responsible business arrangements
  • requiring listed companies to show what effect an increase in share prices will have on executive pay to inform shareholders when voting on long-term incentive plans

The draft regulations will apply pay ratio reporting requirements to listed companies who are required by UK company law to publish a directors’ remuneration report and who have an average number of UK 250+ employees in a financial year.

To decide whether a company exceeds the 250 threshold, it must ‘find for each month in the financial year the number of persons employed under contracts of service by the company in that month (whether throughout the month or not), ‘add together the monthly totals and ‘divide by the number of months in the financial year. If the listed company is a parent company, the number of UK employees within group companies must also be included and pay ratio information must relate to the group not the company. This is the opposite approach to that taken by the gender pay gap reporting regulations, which measure the 250-employee threshold on a company-by-company basis.

The director’s remuneration report for an affected company will have to include a table identifying:

  • the year in which the financial year ends
  • the method used to determine the disclosed figure for pay and benefits of those employees on the 25th, 50th and 75th percentile of pay and benefits in that year
  • its pay ratios

The report must then go on to provide:

  • an explanation of why the company chose the method it did for calculating the pay ratios for the relevant financial year
  • clarification of any deliberate omissions and the reasons for them
  • a brief explanation of any assumptions or statistical modelling used to determiner full-time equivalent remuneration, and
  • an explanation for any increase or decrease in pay ratios from a previous year

According to CIPD and High Pay Centre analysis, the average pay ratio between a FTSE 100 CEO and the average worker’s salary was 129:1 in 2016.

The regulations are expected to come into effect in early 2019, with pay ratios being included in directors’ remuneration reports published during 2020. DBEIS has published a useful Q&A on the new regulations.