Businesses will have to justify exec pay
Rachel Muller-Heyndyk, June 12, 2018
UK firms will be forced to publish and justify details of pay gaps between staff and bosses following concerns over executive pay
Business secretary Greg Clark has announced that companies with more than 250 employees will be required to disclose the pay gap between chief executives and other staff.
The move was welcomed by equal pay campaigners and investor groups. The plans follow concerns that some chief executives have been receiving salaries that do not reflect company performance. Shareholders and campaigners have also argued that executive pay awards have become excessive.
Under the new rules listed companies will also be required to show what effect an increase in share prices will have on executive pay; to inform shareholders when voting on long-term incentive plans.
Peter Cheese, chief executive of the CIPD, said that the new regulations should help to fix the UK’s “broken system of executive pay.”
“The publication of pay ratios is a welcome step in addressing the UK’s broken system of executive pay," he said. "There needs to be a much clearer link between top pay and business performance, but also recognition that business success is a collective endeavour and not down to the actions of a single individual. We want to see much fairer distribution of reward across organisations, especially given that pay packets for the average worker have been squeezed for so long.
“The first year of gender pay gap reporting has shown us that the publication of pay data can help to bring pay practices into focus. We hope that the new laws on pay ratios will make organisations really question whether CEO pay is appropriate and proportionate to personal performance and business outcomes.”
Research from the CIPD last year showed that the average FTSE 100 CEO received an annual pay packet of £4.5 million in 2017, and that 59% of employees cited executive pay as a demotivating issue at work.
Helen Reed, senior associate at Osborne Clarke, said that the reforms represent a positive step towards improving corporate governance. But she added that organisations must not treat this as a ‘box-ticking’ exercise.
“The enhanced disclosure requirements under [these] proposals should be a powerful agent for change – for example the additional reporting requirements on how directors take into account the broader impact of the company's operations," she said. "Some of the proposed reforms, such as the requirement for companies with more than 250 employees to publish chief executive pay ratios annually, have the potential to hit the headlines.
“[But] for it to succeed organisations need to have the right attitude. The key challenge will be ensuring that the new disclosure requirements drive change in wider corporate behaviour, and do not just result in boilerplate disclosure and a 'box-ticking' mentality.”
Reed also warned that the timescales could be challenging; from January 2019 companies will need to consider how they are meeting the new requirements, and be ready to report on them from January 2020.
But, despite widespread calls for senior pay to be reformed, new research from the Chartered Management Institute (CMI) and XpertHR has found that directors' bonuses fell by an average of 16% from £53,504 to £44,987 in 2017.
All tiers of management, from entry-level professionals to top executives, suffered a slowdown in 2017, according to the research. Basic salaries increased by just 2.4% to £34,526 – which is below the Consumer Price Index (CPI) rate of 3% for the corresponding period. This represents a salary cut of 0.6%.
Commenting on her organisation's research, director of strategy and external affairs for the CMI Petra Wilton said that businesses must not rely on high pay packets alone to motivate senior staff.
"This is today’s problem and cannot just be swept under the rug. Britain needs two million more managers by 2024 on top of the existing 3.6 million if it is to meet the demands of a post-Brexit economy, so it is imperative that businesses wake up and improve the workplace environment," she said, citing previous research from the CMI that managers worked an extra 44 days a year last year over and above their contracted hours – up from 40 days extra in 2015.
“To attract the necessary talent businesses must focus on the softer, but no less important, workplace benefits," Wilton added. "This means improving employees’ work/life balance, protecting wellness, giving them training and development opportunities, and fostering a sense of purpose and meaning in their jobs.
“Those are actually far more powerful drivers of employee engagement than money, so this is a great opportunity for employers to reset their thinking about how to attract, motivate and retain their senior talent.”