Charles Cotton: What impact will CEO-to-employee pay ratio legislation have?

Charles-Cotton-CIPD

There is no doubt that the continuing polarisation of pay and reward between chief executive officers (CEOs) and employees in the UK has come to a head. According to the latest Chartered Institute of Personnel and Development (CIPD) and High Pay Centre research, published in August 2017, for every pound their average worker is paid, a FTSE 100 CEO receives £129.

For some time, it has been clear that levels of pay for executives in many organisations do not have a strong link to personal performance or business outcomes, and this is having a direct impact on the wider workforce. Indeed, CIPD research, The view from below: what employees really think about their CEO’s pay packet, published in December 2015, found that just a third of UK employees agree that their CEO is rewarded in line with organisational performance, and over half say the high level of CEO pay demotivates them at work; evidence of the extent of the problem and the knock-on effect on employee engagement and productivity.

The CIPD has been calling for the publication of pay ratios between CEOs and their workforce since 2015, so we welcome the government’s plans to introduce new laws to address this. Good corporate governance must start with the workforce, who play a fundamental role in creating a business’ success, as well as shareholders and the wider community. Publicly-listed companies will not only have to disclose their pay ratio but also justify it, and the latter will hopefully encourage employers to evaluate whether they are rewarding the right things in the right way at the right time.

Beyond the legislation, and through greater transparency and accountability, we hope that all organisations will be prompted to consider the impact that their pay practices might be having on their workforce, and put mechanisms in place to ensure that rewards do not unjustifiably focus on just a few individuals at the top.

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By ensuring that chief executive reward packages are simple and clearly aligned to both financial and non-financial performance measures, organisations will likely reap the benefits of better engagement, motivation, trust, and productivity from their people and for their business.

Charles Cotton is senior performance and reward adviser at the Chartered Institute of Personnel and Development (CIPD)