Stefan Stern: What impact will CEO-to-employee pay ratio legislation have?

Stefan Stern

In the short term, there will be only a limited impact. We already know that there are some large gaps in pay in many workplaces. It is possible that there will be a few pleasant surprises, particularly as we work our way down the FTSE 250 index and into some less vast organisations. Some ratios will be relatively modest.

The real benefit of publishing pay ratios will be felt over the medium to longer term. The huge increase in top pay has developed over the past 20 years or more, bit by bit. Without ratios it has not been possible to track the growth in the gap so easily. It is a bit like gaining weight: if you never step on the scales the chances are you will get an unpleasant surprise in due course (or is that just me?)

Another important aspect of the reform is that it has established the principle of pay ratios as a useful mechanism. And here there is plenty of potential for some imaginative leadership. How much more should a manager get paid than the members of his or her team or division? What should that ratio be? And in addition to the top to middle, what is the top-to-bottom pay ratio in the business? These are good questions which could help managers make better decisions on pay.

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Why have so many people resisted the introduction of pay ratios for so long? It is true that they could be misused or that unfair comparisons could get made. We should all try and avoid doing this. But we urgently need to shine a stronger light on the utterly unjustified and unjustifiable gaps in pay that we see in many organisations today. Only the greedy or the grossly overpaid should feel threatened by this.

Stefan Stern is director at the High Pay Centre