As part of my role as Newton’s head of corporate governance, I have been co-chairing the GC100 and Investor Group, which represents the 100 largest UK companies and UK-based institutional investors. The group was reconvened in 2018 to update its popular guidance on the reporting of directors’ remuneration. This technical document is used widely by UK companies and their advisors when drafting the remuneration reports on which investors vote.
The key change to the guidance reflected the new regulations that will require UK companies to publish the ratio of the CEO’s pay to employees’ median pay. As of 1 January 2019, UK registered companies with a premium listing on the London Stock Exchange have to report annually on the total pay packages given to the average employee and the CEO – and the gap between them. Similar regulations have recently been introduced in other jurisdictions, including the US.
This is not simply a case of reporting on differences in base salary; companies will be required to report based on all elements of pay, including long-term incentives that often account for a significant proportion of a CEO’s total pay but are rarely awarded to the average employee. Pension contributions will also need to be taken into account.
How investors will use this data is yet to be determined. It will be interesting to see which trends emerge as the data set builds over time, both at an individual company level and in comparing companies to their peers. It is hoped that this will offer greater insight into corporate culture and, more specifically, a company’s attitude to its employees.
For investors, it will be particularly interesting to read the accompanying statements and rationale that companies give to explain the ratios. These will form part of engagement conversations between investors and companies, which may be of interest to many pension funds, who appoint investment managers to act as stewards of their members’ retirement pots and whose members tend to represent the average employee.
Potential for a shake-up?
It is likely that one of the first outcomes from this new disclosure requirement will be attention-grabbing headlines in the media. In the world of social media, news spreads quickly, meaning that any outliers may have their pay discrepancies broadcast to a wide audience. If a company reports an unfavourable ratio of CEO to average pay, talented individuals may choose to work elsewhere, in companies where they feel they will be better valued. Conversely, people may be more attracted to companies upon finding out that they have a low ratio of CEO to average employee pay.
From an employee perspective, the disclosures might result in a cohort of disgruntled workers taking action after discovering they are being paid less than the average employee, or could motivate high-achieving, aspiring individuals who see that highly paid CEOs appear to have a disregard for employee pay below the executive ranks to leave. While we can’t know what the employee reaction will be, it is possible that this news could cause a shake-up in certain firms.
Similarly, it cannot be determined what effect this will have on CEO pay, although public reporting of this nature could encourage companies to re-evaluate how they make pay decisions. It could be argued that global alignment is required, but this is in stark contrast to the current impetus surrounding nationalism and protectionism. It is possible therefore that we could see wage inflation across the wider UK workforce. Whatever the outcome, be it intended or otherwise, political pressure is likely to continue should companies not address pay disparity. Pressure can come in a variety of options, including investor calls to action, remuneration committee accountability, and further regulations.
It is certainly early days, but we will be watching carefully as the data is reported, to see the explanations provided and discuss the likely effects.
In connection with this guidance, but also as an independent consideration, we remain committed to engaging and voting on issues surrounding executive pay, with our ultimate goal of improving the alignment between reward and performance.
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