Under new laws laid in Parliament last week, big companies will have to publish and justify the pay differences between chief executives and their staff from 2020.  

The new rules, which are due to come into force on 1 January 2019, will require listed companies with more than 250 UK employees to disclose the total pay of their chief executive officers (CEOs) compared to the median pay of their UK employees. In addition, they will have to compare CEO pay with the pay of employees in the top and bottom quarter of earners.

 In addition to the reporting of pay ratios, the new laws will:

  • require all large companies to report on how their directors take employee and other stakeholder interests into account
  • require large private companies to report on their responsible business arrangements
  • require 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 government has also asked the Financial Reporting Council to revise its Corporate Governance Code to strengthen the voice of employees and other stakeholders in the boardroom.

This new law is well overdue. According to research by the High Pay Centre, the pay of CEOs of the UK’s biggest companies increased from 10 or 20 times that of the average worker in the early 1980s to 45 times in the late 1990s to 120 times today. Over the same period, the share of total incomes accruing to the richest one per cent of the population increased from six per cent to 14 per cent. 

The High Pay Centre argues that by making pay ratios public, companies will be put under pressure to close the gap. They will also provide trade unions with information they can use to support their arguments for pay increases.

As the new law comes into effect in January 2019, companies will start reporting their pay ratios in 2020. Nevertheless, some companies may choose to start making the disclosures in advance of the new regulations taking effect.

Jo Seery of Thompsons Solicitors commented: “While an obligation on companies to disclose the pay ratio of CEO’s to the average pay of their workforce is welcome, the requirements under the regulations are nowhere near enough to address the extent of the pay gap between ordinary workers and senior executives. 

“There should be an obligation on companies to implement measures which would ensure fairer pay distribution and which would properly call companies to account. One very effective measure would be a requirement for trade union representatives to be included on remuneration committees.”

Visit the High Pay Centre to read more.