For financial years starting on or after 1st January 2019, companies in the UK with more than 250 employees will have to comply with the pay-ratio regulations by reporting on the ratio of chief executives’ remuneration to the median pay of UK employees. The reports must be made annually, but the first disclosures will not be required until 2020 as they will be based on the remuneration rates from the 2019 financial year.
The intention of the regulations is that the total pay and benefits of the employees identified should be used. Businesses will need to identify employees on the 25th, 50th and 75th pay quartiles for the purposes of comparing their pay to that of the chief executives. Employee wages and salary must be used as a minimum. However, the Government has advised that other pay and benefit components should also be included where applicable such as taxable benefits, annual bonus, share based benefits and pension benefits.
There are three calculation techniques which can be used when reporting these figures and companies will have to confirm in their report which one they have chosen and why. They will also need to provide an explanation of whether the company believes that the median ratio is consistent with its wider policies on employee pay, reward and progression and why. We will provide more details on how the pay ratios should be calculated nearer the time of reporting.
Unlike with gender pay gap reporting, the figures will not be published on a government website but instead in the company’s director’s remuneration report. As these requirements will be added to existing directors’ report requirements, the consequences of non-compliance will be the same. In other words, if the directors of a company knowingly do not comply with any of the requirements, or are reckless as to their compliance, they will be committing an offence.
In addition to the reporting of pay rations, the new legislation will also:
Require all large companies to report on how their directors take employee and 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
Businesses affected by these regulations may want to consider who within the organisation will need to play a role in reporting from human resources to payroll to communications. It may also be a good idea to try and get a preliminary idea of what the ratio might be in order to understand how employees and the general public may react and prepare accordingly.
If you have any questions or concerns about your reporting responsibilities, get in touch with your dedicated advisor today.