CEO Pay Ratios: What you need to know

What does executive pay ratio reporting involve?

Listed companies with over 250 employees will soon be required to publish the pay ratio between their CEO and other employees. Legislation comes into force in January 2019, with mandatory executive pay ratio reports being required in early 2020. Ahead of this change, we examine what the legislation means and the issues HR teams may face in fulfilling their reporting duties.

Detailed reporting requirements

Executive pay ratio reporting requires companies to identify employees’ average pay across different quartiles in comparison to the CEO’s pay. The CEO’s remuneration is the single figure that companies are already under a legal duty to publish in their annual reports. These figures are accompanied by the reasons for any changes in the ratios from the previous year and whether the employer believes that the median ratio is consistent with the company’s general employee pay, reward and progression policies.

There are three acceptable methodologies for calculating the ratio. When publishing their figures in the company’s directors’ remuneration report, companies must state the method they chose and why. Executive pay ratio reporting has not attracted the same spotlight as gender pay reporting, but may well be more time-consuming for companies, both in calculation and explanation.

The acceleration of executive pay

Paydata’s PAYgrade database captures the salaries for different roles based on defined levels of seniority.

Top level senior management and executives have seen a pay rise equivalent to 46 per cent since 2006 whilst the more junior bands of roles have seen more incremental increases, such as operations and support roles which have seen a pay rise equivalent to 10 per cent since 2006. There is a huge disparity between the experience of top and bottom earners, with the gap widening.

Communication is key

Setting the raw figures in context is crucial. With wage inflation remaining pretty flat for most employees, executive pay is something that can start to grate when the ratio has increased by 174 per cent over the last twenty years. The 2017 pay ratio of 167:1 was estimated to be 47:1 in 1998. Although this legislation does not guarantee that this acceleration will be reined in, it is a tool that will undoubtedly promote useful dialogue and bring employer practices into sharp focus.

Those with a strong narrative will be able to explain the ratio in relation to whether they are a ‘fair’ place to work. Considerations such as having to include bonus payments and share-based incentives could complicate the calculation but also skew the ratio where share value has increased or a long-term incentive vests in a certain year. The requirement to include full-time-equivalent pay for contracted self-employed individuals and outsourced aspects of the business may also dilute the accuracy of the ratio, undermining its ability to truly reflect the highest and lowest paid.

A framework for the future

Fairness and transparency will continue to shape the framework for setting pay. The ratio underlines the importance of providing shareholders with peace of mind that high paid executives bring positive value to the company. Monitoring both who employers are focusing their reward on and what the drivers are for reward such as high performance, greatest contribution and an awareness of the external and internal markets are all key to an organisation’s ability to create an equal platform for their current and prospective employees.

Paydata Director Tim Kellett comments, “Transparency around pay and reward is being driven by employers having to be more accountable for their business practices. Greater scrutiny around executive pay and the gender pay gap reporting requirements are changing the dynamic, with employers realising that openness around the processes behind their pay decisions promotes fairness and inclusion within the business.”

To find out more about what the reporting requirements mean for your business.