A short guide to CEO pay ratio reporting
The question of whether or not UK employers should be legally required to report on pay gaps within their organisations is one that has been debated for many years now. Unequal pay between men and women has, in fact, been illegal since the introduction of the Equal Pay Act in 1970, but at the time no measures were put in place to require employers to actually publish any salary details.
However, only recently has the government taken steps to regulate and enforce reporting. On 6th April 2017, it became compulsory for companies of a certain size to publish their gender pay gap figures at the end of each financial year.
No doubt most businesses are now well aware of these obligations, but they are perhaps less familiar with another pay reporting ruling that has more recently come into force. On 1st January 2019, the Department of Business, Energy & Industrial Strategy (BEIS) introduced CEO pay ratio reporting, with the first disclosures expected at the start of 2020.
What is CEO pay ratio reporting?
Part of The Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860), CEO pay ratio reporting was introduced as part of a wider push to improve corporate governance practices in the UK.
In short, it requires employers to publish and explain how the total remuneration of their top boss compares to that for the lower quartile (or 25th percentile), median (or 50th percentile) and upper quartile (or 75th percentile) salary of the rest of their employees. The new requirements will only apply to large UK listed companies with over 250 employees.
It might sound to some like a simple exercise – but in reality, there are a number of specific guidelines that must be followed to ensure complete compliance. Payroll, HR and finance teams will need to work closely together to prepare the reports to the required standard – and this is an exercise that has to be completed each financial year.
Let’s take a closer look at what they need to know, what they need to do, and how Zellis can help.
Who exactly does it effect?
First of all, we need to understand exactly what is meant by a ‘large UK listed company’. Per The Companies Act 2006, the definition includes not only incorporated companies on the UK Official List, but also those that have shares quoted on:
- The New York Stock Exchange (NYSE)
- Any recognised stock exchange within the European Economic Area
Therefore, the number of companies that qualify is actually higher than you might have thought.
You might also be wondering: “What about smaller businesses?”
Well, for now at least, smaller businesses are not legally required to disclose these reports, but should they still wish to publish their data, they can follow the official guidance.
Determining CEO remuneration
The starting point is, of course, to identify the organisation’s CEO and his or her total remuneration (represented as a single figure) for the relevant financial year. Note that ‘total remuneration’ for any employee includes not just salary and other cash payments, but also:
- Any taxable benefits and incentives
- Share-based remuneration
- Pension benefits
Calculating the CEO pay ratio
The next step is to calculate the CEO pay ratio. The regulation actually permits employers to use one of three different methods to do this:
Option A: This is the government’s preferred method. Employers determine the actual full-time equivalent (FTE) remuneration for all UK employees for the relevant financial year. These data points are listed from lowest to highest and the median, lower quartile and upper quartile are identified. The three ratios are then calculated against the CEO’s total remuneration figure.
Option B: Employers can use existing pay data, such as gender pay data, to identify the three UK employees at the median, lower quartile and upper quartile points on an indicative basis. This means that companies taking this option must also then calculate the total remuneration for those employees for the relevant financial year.
Option C: Employers can use any other existing pay data (subject to certain restrictions) to identify the median, lower quartile and upper quartile points on an indicative basis, but then must follow Option B in calculating total remuneration for those employees for the relevant financial year.
However, should employers choose to take either Option B or Option C, they will be required to justify their decision in the additional reporting.
Once the ratios have been calculated, they must be disclosed in a specific table in the annual directors’ remuneration report. In addition to the reporting of ratios, employers will also be required to publish supporting information to explain:
- Any increase or decrease from the previous financial year
- Whether the increase or decrease is due to specific actions taken by the company
- If the company believes the median pay ratio for the relevant financial year is consistent with the pay, reward and progression policies for its UK employees
When providing this supplementary information, employers can also choose to explain how employment trends in their industry/sector influence levels of remuneration, especially as it relates to competition for executive recruitment.
If the introductions of both gender pay reporting and CEO pay ratio reporting in the last few years are any indication, there’s a strong chance that the government will introduce further pay reporting regulations in the future – and widen the scope of existing ones.
In fact, it was reported earlier this year that the government is considering extending gender pay gap reporting requirements to small companies, as well as strengthening the power of authorities to enforce them. We also know that there are ongoing discussions about the possibility of introducing ethnicity pay gap reporting in the near future.
But what this means, above all, is that employers need to be equipped with the right payroll, HR and analytics technology to make pulling these reports together quick, accurate, and as simple as possible.
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Zellis is the largest provider of payroll and HR software, and Managed Services, to UK and Ireland-based companies with over 500 employees.
With over 50 years’ experience and almost 1,200 employees, we count a third of the FTSE 100 as customers, serve over five million employees, and process more than 60 million payslips a year.