Business leaders welcome scrutiny of chief executive pay

Business leaders have welcomed government proposals to make large companies justify the pay of their chief executives and reveal how much higher it is than that of their average worker.

The move affects UK listed companies with 250 employees or more. They will have to disclose the pay ratios – the difference between the top and average earners – every year.

The new regulations are part of a package of reforms that will hold big businesses to account for the salaries they pay, while giving employees a greater voice in the boardroom. Ministers say they’re addressing concerns that some chief executives have been receiving salaries that are out-of-step with company performance.

In addition to the reporting of pay ratios, the corporate governance laws will also:

• require all large companies to report on how their directors take employee and other stakeholder interests into account
• require large private companies to report on their responsible business arrangements
• require listed companies to show what effect an increase in share prices will have on executive pay to inform shareholders when voting on long-term incentive plans.

The Chief Executive of the Investment Association (IA) Chris Cummings said: “The UK has a global reputation as a leader in corporate governance and we welcome the reforms as they focus on the long-term interest of all company stakeholders, including shareholders and employees.

“Investors are demanding greater director accountability and transparency on executive remuneration.

“Pay ratios will shine a spotlight on what executives are being paid compared with their workforce, and investors will expect boards to articulate why the ratio is right for the company and how directors are fulfilling their duties.”

Matthew Fell, Chief UK Policy Director of the CBI, said: “The CBI is clear that high pay is only ever justified by outstanding performance. High pay for mediocre or poor performance is unacceptable.

“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.”

Subject to Parliamentary approval, the regulations will come into effect from 1 January 2019 meaning that companies will start reporting their pay ratios in 2020.

Please contact Jon Alvarez if you would like more information about the issues raised in this article or any aspect of company law.