Pay focus – The executive pay gap and reporting requirements
Pay reporting is a hot topic. You may remember our article before Christmas covering the disability pay gap, and the fact calls had been made for the introduction of mandatory ethnicity pay reporting for large companies (see our article here). Now, in the first month of 2020, new data published by the CIPD and The High Pay Centre confirm that in just three days, CEOs of top FTSE 100 companies will have earned the same amount of money as a typical full-time employee in an entire year (full article here). This is despite the ongoing general trend that CEO pay is decreasing (figures published by CIPD show that CEO pay has decreased by 13%. Full article here).
The recent figures have attracted extensive media coverage which does beg the question, what do we need to know about executive pay reporting?
What is executive pay reporting?
In a nutshell, it is the requirement to disclose information on the executive pay ratios and average staff pay in the company. The Companies (Miscellaneous Reporting) Regulations 2018 (the Regulations) amend existing requirements to require relevant companies to publish as part of their directors’ remuneration report, the ratio of their CEO’s total remuneration, to the 25th, 50th, and 75th percentiles of full-time equivalent remuneration of their UK employees. Companies caught by the Regulations are required to provide this information for the financial years beginning on or after 1 January 2019, so reporting is to take place later this year.
Who should comply with the mandatory requirements?
It is a statutory requirement for UK listed companies with an average of more than 250 employees, to disclose annually the ratio of their CEO’s pay compared to that of their other employees. The regulations define an ‘employee’ as “a person employed under a contract of service by the company other than a person employed to work wholly or mainly outside of the UK”. The definition is narrower than that for gender pay gap reporting purposes and it is unlikely that consultants and those who work on an agency basis will be caught by the definition.
How is the ratio calculated?
There are three optional methods of calculation:
- Option A
In order to rank the 25th, 50th and 75th percentiles using this method, a company must calculate the total full-time equivalent pay and benefits of all its UK employees for the relevant financial year. This is the most accurate method of calculation.
- Option B
This option permits a company to rank the 25th, 50th and 75th percentiles using their existing gender pay gap information.
- Option C
This option permits a company to rank the 25th, 50th and 75th percentiles using other existing pay data so long as the pay data is not older than the previous financial year.
Regardless of what method of calculation is chosen by a company, the ratios must be calculated against the CEO’s single total figure of remuneration, which is already part of the director’s report. A company is not bound to use one method of calculation and can opt to use different methods each financial year.
What are the sanctions?
Directors can face criminal conviction, a fine or both, if they negligently or knowingly fail to adhere to the reporting requirements. For more information on pay reporting and equal pay generally, please contact our employment team.
Claire Knowles – Partner
Mark Alaszewski – Associate
Rebecca Mahon – Solicitor
Amelia Wheatstone – Solicitor
Adam McGlynn – Trainee Solicitor