The Department for Business, Energy and Industrial Strategy (BEIS) has set out new regulations requiring UK listed organisations with more than 250 UK-based employees to annually publish and justify the pay difference between their chief executives and employees.
The pay ratio reporting regulations are part of a package of reform measures going before Parliament for approval today (Monday 11 June 2018). If this is granted, the regulations will come into effect from 1 January 2019, with an initial pay ratio reporting date scheduled for 2020.
The new regulations have been devised as part of the government’s industrial strategy, which seeks to ensure that large organisations are transparent and accountable to both their employees and shareholders.
The regulations are being introduced to mitigate concerns that some chief executives have been receiving salaries that are not aligned with organisational performance.
In addition to reporting and justifying pay ratios annually, all large organisations will be required to report on how its directors take employee and other stakeholder interests into account, to report on responsible business arrangements, and to show what effect an increase in share prices will have on executive pay, in order to inform shareholders who are voting on long-term incentive plans.
Greg Clark, business secretary, said: “One of Britain’s biggest assets in competing in the global economy is our deserved reputation for being a dependable and confident place in which to do business. Most of the UK’s largest [organisations] get their business practices right, but we understand the anger of [employees] and shareholders when bosses’ pay is out of step with [organisational] performance.
“Requiring large [organisations] to publish their pay gaps will build on that reputation by improving transparency and boosting accountability at the highest levels, while helping build a fairer economy that works for everyone.”
Chris Cummings, chief executive officer at the Investment Association (IA), added: “Investors are demanding greater director accountability and transparency on executive remuneration. Pay ratios will shine a spotlight on what executives are being paid compared with their workforce, and investors will expect boards to articulate why the ratio is right for the [organisation] and how directors are fulfilling their duties.”
Luke Hildyard, director at the High Pay Centre, said: “Pay ratios provide an insight into culture and employment practices of major [organisations] that is useful to investors, [employees] and wider society alike. This is a welcome move that will greatly improve public understanding of the pay gap between those at the top and low and middle-income earners. We hope that it will initiate a more informed debate about what represents fair, proportionate pay for [employees] at all levels.”