Firms will have to justify pay gap between workers and bosses
The country’s biggest public businesses may soon have to publish the gap between the pay of their chief executive and an average worker.
Business Secretary Greg Clark says directors of all companies with more than 250 employees will be required to disclose and explain this difference – known as the “pay ratio”.
Equal pay campaigners, business and investor groups welcomed the plan. But the TUC said it was “a first step” and even tougher rules were needed.
In recent years shareholders have become increasingly vocal over executive pay levels, and have voted against what they see as excessive pay awards, most notably the high sums paid to former WPP boss, Sir Martin Sorrell.
But top level remuneration, particularly chief executives, is often linked to the performance of the share price.
The new rules, as well as introducing the publication of pay ratios, will also require listed companies to show what effect an increase in share prices will have on executive pay, in order to inform shareholders when voting on long-term incentive plans.
The plans, which will be presented to Parliament on Monday, follow concerns that some chief executives have been receiving salaries that are out of step with company performance.
Mr Clark said: “Most of the UK’s largest companies get their business practices right, but we understand the anger of workers and shareholders when bosses’ pay is out of step with company performance.”
The plans were welcomed by the Investment Association – that represents UK investment managers – as well as business lobby group the CBI and think tank the High Pay Centre.
Chris Cummings, chief executive of the Investment Association, said investors wanted greater director accountability and more transparency over executive remuneration.
“Investors will expect boards to articulate why the ratio is right for the company and how directors are fulfilling their duties,” he said.
The director of the High Pay Centre, Luke Hildyard, said pay ratios could prove useful to investors, workers and society more broadly.
“We hope that [the move] will initiate a more informed debate about what represents fair, proportionate pay for workers at all levels,” he said.
The Confederation of British Industry’s Matthew Fell said high pay was only ever justified by outstanding performance: “This legislation can help to develop a better dialogue between boards and employees about the goals and aspirations of their business, and how pay is determined to achieve this shared vision.”
TUC general secretary Frances O’Grady called for guaranteed places for worker representatives on boardroom pay committees, saying they would bring “common sense and fairness to decision-making when boardroom pay packets are approved”.
If approved, the regulations will come into effect from the start of next year, meaning companies will start reporting their pay ratios in 2020.