UK’s biggest firms will have to justify pay gap between bosses and their workers

In a move designed to promote pay transparency, these companies must report on the difference in pay between their chief executives and their average UK employee. It means that for the first time ever, UK listed companies will have to disclose and justify this difference – known as ‘pay ratios’ – every year. Companies will therefore need to start reporting their pay ratios from 2020 onwards.

Who will be affected by pay ratio reporting?

All UK listed companies will be required to report their pay ratio if the average number of their UK employees is more than 250 in the relevant financial year. For these purposes, an employee includes anyone ‘employed under a contract of service by the company’. However, those who work wholly or mainly outside the UK are excluded.

For parent companies, the pay ratio information will relate to the group rather than each individual company and the average number of UK employees is to be calculated using the number of UK employees in the group.

What information will have to be published?

Companies will be required to publish pay ratio information in the director’s remuneration report, specifically they must identify and compare CEO pay to the pay for employees on the 25th, 50th and 75th quartile of pay in their organisation. Average pay data can be taken from the data generated as part of the company’s annual gender pay gap report and the CEO pay data must be the ‘single figure’ the company already publishes in its annual report.

In addition to the pay ratio information, companies will be compelled to “justify” their CEO salary, as well as reporting on how their directors take employee and other stake holder interests into account. Specifically, the directors’ report for the financial year will need to contain a statement describing the action that has been taken during that year to:

• introduce, maintain or develop arrangements aimed at providing employees systematically with information on matters of concern to them as employees
• consult employees or their representatives on a regular basis so that the views of employees can be taken into account in making decisions which are likely to affect their interests
• encourage the involvement of employees in the company’s performance through an employees’ share scheme or by some other means
• achieve a common awareness on the part of all employees of the financial and economic factors affecting the performance of the company.

What to do now?

Many organisations underestimate the amount of work required to report on their gender pay gap data and now in their pay ratio data, so if your organisation is likely to be caught by these new requirements it is sensible to prepare early for the change. The amount of work may be more or less difficult depending on the make-up of your workforce, your method of remuneration and the payroll system in place.In particular, affected employers should:

• allocate a person or team to take responsibility for compliance with this new requirement
• identify their ‘relevant employees’
• familiarise themselves with the required approach to the calculation of the pay and benefits of UK employees to ascertain how these calculations can be undertaken
• consider conducting an initial audit and risk assessment to identify potential problem areas.