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UK companies to be forced to justify pay gap between CEO and staff

Out-Law News | 12 Jun 2018 | 9:08 am | 1 min. read

Large UK companies will be required to justify their chief executives’ salaries and reveal the gap to their average UK worker, under new legislation introduced on Monday.

The new law will impose the requirement on all UK listed companies with more than 250 employees.

Companies will also have to report on how their directors take employee and other stakeholder interests into account and on their responsible business arrangements, and will have to show what effect an increase in share prices will have on executive pay.

Business secretary Greg Clark said the changes would improve transparency and boost accountability towards employees and shareholders.

The changes were signalled last year when the government published its response to a consultation on corporate governance reform, and come in a climate of increasing calls for transparency over executive pay.

Last year the Investment Association (IA) called on its members to voluntarily disclose the ratio of pay between a company's chief executive and the median or average employee, as well as the chief executive and the rest of the executive team.

IA chief executive Chris Cummings welcomed the latest move, saying: “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.”

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

In December the Financial Reporting Council published a draft revised UK Corporate Governance Code, set to come into force for accounting periods beginning 1 January 2019. The proposed new code includes provisions which direct remuneration committees to engage with remuneration in a more strategic and principled manner.