UK to Introduce Pay Ratio Disclosure Law in May

UK to Introduce Pay Ratio Disclosure Law in May

The UK government will propose legislation next month that will require companies to publish the ratio between the compensation of their CEO and that of their median employee, the Financial Times reported on Sunday. The rule is expected to come as part of a package of corporate governance reforms meant to address inequality by reining in executive compensation practices widely seen as excessive, which will also require boards of directors to demonstrate that they have acted in the interests of their companies’ employees, customers, and other stakeholders, rather than just the interests of investors. Large companies will also be required to certify compliance with a corporate governance code.

The writing has been on the wall for UK companies for some time now. The government first announced plans to institute a pay ratio reporting requirement last August, as well as to “name and shame” companies whose investors object to their executive pay packages. Recently, several large British companies have faced drubbings from investors and the media over the millions of pounds in bonuses they paid out to their top executives this year

At the beginning of this year, a report from the CIPD and the High Pay Centre revealed that the average FTSE 100 CEO earned £3.45m last year, or 120 times the £28,758 earned by the average British worker. At an average hourly rate of £898 per hour, the top CEOs earned more than the average employee by the third working day of the year, which campaigners quickly dubbed “Fat Cat Thursday.”

The pay ratio reporting rule is similar to the one that recently came into effect for public companies in the US, which the Securities and Exchange Commission adopted in 2015 under a mandate established by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. US businesses have complained that the rule subjected them to unfair public criticism, as these comparisons can be misleading and the median employee salary is not always easy to calculate. The first round of pay ratio disclosures have been coming in amid the ongoing proxy filing season and so far, critics have argued, they don’t give investors or the public much useful information.

Employers have been less worried about how the public would react to their CEOs’ salaries (which were already included in proxy filings with the SEC) than about how their employees would react to the disclosure of the median salary, which by definition would inform half of the company’s workforce that their pay was below average. Companies have reported wildly divergent median salaries depending on how many of their workers are based in low-wage countries, or how much of their operations are outsourced to contractors.

In any case, UK companies may soon face the same challenge as their American counterparts of communicating their pay ratio internally and externally, which will require them to carefully explain how they make pay decisions. Laws like these are one factor—but just one of many—pushing employers steadily further toward pay transparency.