UK leads the way in tackling executive pay issues UK leads the way in tackling executive pay issues

UK leads the way in tackling executive pay issues
16 Nov 2017

The gap between the pay of the highest and average earners in an organisation is often a source of criticism and disaffection both internally and externally. Indeed, inflated executive pay is now a matter of concern (or everyone from shareholders and customers to members of the wider public. The UK’s Prime Minister Theresa May described it as "the unacceptable face of capitalism".

In fact, the UK, European Union (EU) and US have all referred to executive pay as a key corporate governance issue and have each separately been considering whether to implement obligations that would require employers to disclose information on the pay ratios within their businesses.

Many of us had assumed that this initiative had fallen by the wayside in the UK as Brexit planning took over. But on 29 August 2017, the government outlined a package of corporate governance reforms, which included proposed new laws to force all listed companies to reveal the pay the ratio between bosses and workers.

UK corporate governance reform

At the end of November 2016, the government published a Green Paper on corporate governance reform, with a. view to considering which changes might help to ensure a UK economy that works for everyone. A particular focus was on executive pay

 The Green Paper sought views on options for:

  • Strengthening shareholder influence over directors' remuneration;
  • Simplifying, strengthening and increasing the transparency of long-term incentive plans.
  • Achieving executive pay that is sustainable into the long-term, fair, transparent and related to performance.

The government published its response to the Green Paper on 29 August 2017. In it, it addressed the issue of executive pay transparency and agreed that annual pay ratio reporting would assist companies in demonstrating to employees and investors how executive remuneration relates to wider workforce pay at a given moment, and over time.

Furthermore, the government said it intended to introduce legislation that would require certain companies to report the ratio of chief executive (CEO) pay to average workforce pay on an annual basis.

Here are some answers to commonly asked questions about the government's proposals:

1. Which companies will need to report on pay ratios?  The new reporting obligation will apply only to listed companies. 

  1. What information will have to be reported? Public companies will need to some up with annual remuneration reports, which include the following information:
  • The ratio of CEO pay to the average pay of the company's UK workforce
  • A narrative explaining changes to that ratio from year-to-year;
  • A narrative explaining how the ratio relates to pay and conditions across the wider                                                                                                           

  A methodology for calculating pay ratios is still under consideration and legislation is expected on the subject later this year. The current proposal is that the ratio will be calculated based on the CEO's total remuneration (the "single figure" in the director’s remuneration report) relative to the average total remuneration of the company's entire UK workforce.                                                                                                      

  1. When will the new obligation to report pay ratios come into force?

Draft legislation is expected to be laid before Parliament in March 2018. The current aim is that the reforms will come into effect by June 2018. The current aim is that the reforms will come into effect by June 2018 and will apply to company reporting years that commence on or after the date.

  1. What impact will the new legislation have on shareholders and remuneration committees? In its response to the Green Paper; the government indicated that it intends to invite the Financial Reporting Council to revise the UK Corporate Governance Code to:
  • Be more specific about the steps that certain companies should take if there is significant shareholder opposition to executive pay policies;
  • Give remuneration committees broader responsibility for overseeing pay and incentives across the company, and require that they engage with the wider workforce to explain how executive remuneration aligns with wider company pay policy.
  1. Which proposed measures will not see the light of day? Some new measures were discussed in the Green one Paper that will not be taken forward. These include:
  • Quoted companies being required to establish a shareholder committee to oversee executive pay, directors' nominations and strategy;
  • Adding further regulation to the current disclosure framework for directors' bonus                                            
  1. How do the new requirements affect companies' obligations to disclose information relating to executive pay?

The new measures to disclose executive pay ratios will some on top of existing requirements, which include:

  • The UK Corporate Governance Code, which governs the behaviour of remuneration committees that set directors' remuneration;
  • The Companies Act 2006, NVECI1 requires listed companies to include details of directors' remuneration in the directors' remuneration report, in supplementary materials accompanying the strategic report and notes to the accounts;
  • Sector-based guidance and obligations. The new measures will be separate from other gender pay gap reporting requirements.          
  1. What about employers that are not listed companies? The strictest corporate governance and reporting standards in the UK apply to public companies. Many employers are, of course, private-or are not companies at all.

But while they may not be required to comply with measures relating to executive pay to the same extent, the pay ratio issue is still relevant, not least in reputational and employee engagement terms. Stakeholders of large private companies will have the same concerns about executive pay as the shareholders of public companies.

Although the latest corporate governance reforms have been criticised by trade union umbrella organisation the TUG as "feeble" and "watered down", other jurisdictions have shelved their pay ratio reporting activity completely, which means the UK is currently leading the way.

 

By Anne-Marie Balfour is a legal director in the employment, pensions and immigration team at Charles Russell Speechlys LLP. She advises employers, senior executives and recruiters on all aspects of employment law, including contracts of employment, dismissals, employment tribunal litigation, TUPE, restructuring, discrimination, whistleblowing and working time issues. She expertise in dealing with migration-related employment law issues and has an interest in the impact of Brexit on employment law. 

The gap between the pay of the highest and average earners in an organisation is often a source of criticism and disaffection both internally and externally. Indeed, inflated executive pay is now a matter of concern (or everyone from shareholders and customers to members of the wider public. The UK’s Prime Minister Theresa May described it as "the unacceptable face of capitalism".

In fact, the UK, European Union (EU) and US have all referred to executive pay as a key corporate governance issue and have each separately been considering whether to implement obligations that would require employers to disclose information on the pay ratios within their businesses.

Many of us had assumed that this initiative had fallen by the wayside in the UK as Brexit planning took over. But on 29 August 2017, the government outlined a package of corporate governance reforms, which included proposed new laws to force all listed companies to reveal the pay the ratio between bosses and workers.

UK corporate governance reform

At the end of November 2016, the government published a Green Paper on corporate governance reform, with a. view to considering which changes might help to ensure a UK economy that works for everyone. A particular focus was on executive pay

 The Green Paper sought views on options for:

  • Strengthening shareholder influence over directors' remuneration;
  • Simplifying, strengthening and increasing the transparency of long-term incentive plans.
  • Achieving executive pay that is sustainable into the long-term, fair, transparent and related to performance.

The government published its response to the Green Paper on 29 August 2017. In it, it addressed the issue of executive pay transparency and agreed that annual pay ratio reporting would assist companies in demonstrating to employees and investors how executive remuneration relates to wider workforce pay at a given moment, and over time.

Furthermore, the government said it intended to introduce legislation that would require certain companies to report the ratio of chief executive (CEO) pay to average workforce pay on an annual basis.

Here are some answers to commonly asked questions about the government's proposals:

1. Which companies will need to report on pay ratios?  The new reporting obligation will apply only to listed companies. 

  1. What information will have to be reported? Public companies will need to some up with annual remuneration reports, which include the following information:
  • The ratio of CEO pay to the average pay of the company's UK workforce
  • A narrative explaining changes to that ratio from year-to-year;
  • A narrative explaining how the ratio relates to pay and conditions across the wider                                                                                                           

  A methodology for calculating pay ratios is still under consideration and legislation is expected on the subject later this year. The current proposal is that the ratio will be calculated based on the CEO's total remuneration (the "single figure" in the director’s remuneration report) relative to the average total remuneration of the company's entire UK workforce.                                                                                                      

  1. When will the new obligation to report pay ratios come into force?

Draft legislation is expected to be laid before Parliament in March 2018. The current aim is that the reforms will come into effect by June 2018. The current aim is that the reforms will come into effect by June 2018 and will apply to company reporting years that commence on or after the date.

  1. What impact will the new legislation have on shareholders and remuneration committees? In its response to the Green Paper; the government indicated that it intends to invite the Financial Reporting Council to revise the UK Corporate Governance Code to:
  • Be more specific about the steps that certain companies should take if there is significant shareholder opposition to executive pay policies;
  • Give remuneration committees broader responsibility for overseeing pay and incentives across the company, and require that they engage with the wider workforce to explain how executive remuneration aligns with wider company pay policy.
  1. Which proposed measures will not see the light of day? Some new measures were discussed in the Green one Paper that will not be taken forward. These include:
  • Quoted companies being required to establish a shareholder committee to oversee executive pay, directors' nominations and strategy;
  • Adding further regulation to the current disclosure framework for directors' bonus                                            
  1. How do the new requirements affect companies' obligations to disclose information relating to executive pay?

The new measures to disclose executive pay ratios will some on top of existing requirements, which include:

  • The UK Corporate Governance Code, which governs the behaviour of remuneration committees that set directors' remuneration;
  • The Companies Act 2006, NVECI1 requires listed companies to include details of directors' remuneration in the directors' remuneration report, in supplementary materials accompanying the strategic report and notes to the accounts;
  • Sector-based guidance and obligations. The new measures will be separate from other gender pay gap reporting requirements.          
  1. What about employers that are not listed companies? The strictest corporate governance and reporting standards in the UK apply to public companies. Many employers are, of course, private-or are not companies at all.

But while they may not be required to comply with measures relating to executive pay to the same extent, the pay ratio issue is still relevant, not least in reputational and employee engagement terms. Stakeholders of large private companies will have the same concerns about executive pay as the shareholders of public companies.

Although the latest corporate governance reforms have been criticised by trade union umbrella organisation the TUG as "feeble" and "watered down", other jurisdictions have shelved their pay ratio reporting activity completely, which means the UK is currently leading the way.

 

By Anne-Marie Balfour is a legal director in the employment, pensions and immigration team at Charles Russell Speechlys LLP. She advises employers, senior executives and recruiters on all aspects of employment law, including contracts of employment, dismissals, employment tribunal litigation, TUPE, restructuring, discrimination, whistleblowing and working time issues. She expertise in dealing with migration-related employment law issues and has an interest in the impact of Brexit on employment law.