Government to introduce laws requiring listed firms to reveal CEO-to-employee pay ratios

pay ratios

The government is to introduce new laws that will require listed organisations to publish the pay ratio between their chief executive officer (CEO) and average UK employee.

The legislative reforms, which are expected to come into effect by June 2018, will require listed organisations to publish and justify their CEO-to-average UK employee pay ratio, and force all organisations of a significant size to publicly explain how directors account for employees’ and shareholders’ interests. The legislation will also require all large employers to make their responsible business arrangements public.

In addition, a public register will be established to identify listed organisations where a fifth of investors have objected to annual pay packages for executives. This register will launch in the autumn and will be overseen by the UK investment manager trade body, the Investment Association.

The Financial Reporting Council (FRC) will introduce a new requirement into the UK Corporate Governance Code to ensure the interests of staff at publicly-listed organisations are better represented at board level. Organisations will have to assign a non-executive director to represent employees, create an employee advisory council or nominate a director from their workforce. If an organisation does not comply with this aspect of the UK Corporate Governance Code, it will have to explain why it has not done so.

The FRC will consult on the changes to the code this autumn and intends to publish a revised version by mid-2018, which would apply to most businesses by 2019.

The FRC will also seek to develop a voluntary set of corporate governance principles for large private organisations.

The measures follow the government’s Corporate governance reform green paper, which set out potential measures to address concerns around executive pay and transparency; how to strengthen stakeholder voices, including that of employees, in the boardroom; and options for improving corporate governance frameworks for large, privately-owned organisations. The green paper was published on 29 November 2016 and a consultation into the measures outlined ran until 17 February 2017.

Greg Clark, business secretary, said: “One of Britain’s biggest assets in competing in the global economy is our deserved reputation for being a dependable and confident place in which to do business. Our legal system, our framework of company law and our standards of corporate governance have long been admired around the world.

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“We have maintained such a reputation by keeping our corporate governance framework under review. Today’s reforms will build on our strong reputation and ensure our largest [organisations] are more transparent and accountable to their employees and shareholders.”

Stephen Haddrill, chief executive officer at the FRC, added: “The UK’s deserved reputation for good corporate governance, earned over the last 25 years, has underpinned British business success. How we develop the framework will be key to boosting competiveness, transparency and integrity in business particularly after Brexit. Successful and sustainable business are not just good for the economy, they support wider society by providing jobs and helping to create prosperity.”