Fairness in the pay ratio

Large UK companies will shortly be obliged to disclose the differential in pay between their CEO and the median in their UK workforce. This new executive pay ratio disclosure was the subject of an interesting meeting yesterday hosted by the High Pay Centre, Standard Life Foundation and NatCen Social Research, marking the launch of a joint project to capture and report on pay ratio disclosures. Happily for this blog, much of yesterday’s discussion reflected on the issue of fairness.

Most on the panel and in the self-selecting room (being constrained by the Chatham House rule, I may not attribute any comments to individuals) welcomed the move to disclose ratios and the potential impacts of that disclosure. There was, however, some doubt about how significant those impacts might be, in terms of either constraining executive pay or increasing fairness.

As well as requiring disclosure of CEO pay against the median of the UK workforce, the new reporting regulations require it to be compared with both the 25th and 75th centiles, potentially revealing more about the overall shape of pay across the workforce (the lower of these was felt to be of particular significance by those campaigning in support of the low paid). In addition, the board must seek to explain any changes in the pay ratio year on year — specifically whether this is due to changes in pay levels or to changing business models (including moves to outsource, for example) — and “whether, and if so why, the company believes the median pay ratio for the relevant financial year is consistent with the pay, reward and progression policies for the company’s UK employees taken as a whole”.

Notwithstanding this range of required disclosures, it seems likely that the bulk of the attention will be on the median pay ratio itself. The powerful comment was made that there is a danger that we have taken a big and complex issue and tried to turn it into a single uninformative datapoint that narrows the focus and risks distracting from the breadth of the issue. Not least because ratios will vary between sectors and because of different business models within sectors, and because of the different extents of activity within the UK — there will be minimal comparability between companies. This is another possible case of it being unhelpful to focus solely on numerical analysis.

Some participants in the discussion believe that the new requirements to report in relation to a director’s s172 duties to all stakeholders, in particular in this context naturally the workforce, are likely to be more powerful. And a number of companies have used these new obligations to report on workforce relations as a reason to mount fair pay audits and consider what fairness looks like in this context. Other participants noted how pay gap reporting opens a window on broader issues of corporate culture and provides shareholders with potential questions about how sustainable a business model is if it is based on unfairness — this is a potential “barometer on a company’s culture” for some.

The discussion of the distinction between board approaches to gender pay gap disclosures and the forthcoming pay ratio transparency was instructive. Apparently, many boards readily accepted that gender pay differentials are an issue — a fairness issue — and the disclosure requirement led companies to develop new information, some of which shocked them as well as the outside world. This combination meant there was a readiness to act on the gender pay gap data and to work to address the unfairnesses that were revealed.

In contrast, there is not expected to be any shock value in the pay ratio transparency. If anything, the data for FTSE100 companies is revealing smaller ratios than those estimated previously. Though the ratios are still big, they are not quite as large as the numbers calculated by various campaigners on the basis of available information — as a generalisation apparently, FTSE 100 companies pay better than the country average. Further, it is not clear to corporate boards that a lower ratio is better given that they wish to be paying for performance. Thus, it is less than clear that boards will respond to the new disclosures.

In effect, the argument was that boards do not see the pay ratio as revealing a problem of unfairness that needs addressing.

Happily, there was some encouragement from other sources, though perhaps in a rather negative form. One participant asked the rhetorical question of whether the people at the top of large corporations, both executives and non-executive directors, actually understand what people are paid? In particular, do they know how low the pay is for many workers at the bottom of their income distribution? The revelation of the overall ratio and particularly the lower quartile ratio may reveal new insights for those leading organisations that may lead to different questions and potentially different behaviours — paying lower paid workers more generously, perhaps more fairly. 

Let us hope that some of the board conversations that are sparked by the ratio disclosures, and some of the narrative reporting in response to the new requirements, are open about the issue of fairness.

 

The Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860) 

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