Nicholas Stretch: Preparing for new reporting obligations on engagement and pay

This year sees the implementation of several corporate governance developments which reward managers, among others, need to get to grips with. Although newspaper headlines continue to focus on executive pay levels, a number of other reward-related changes, which have received far less publicity, need to be considered.

For 2019 onward, so in annual reports from 2020, it is a statutory requirement for organisations, listed or unlisted, with more than 250 UK employees across their group to report on their engagement with employees.

Items to be covered include how they have consulted with employees and taken account of their interests when making decisions affecting them, as well as any action taken to involve employees in business performance, whether through a share scheme or otherwise.

Quoted companies with more than 250 UK group employees must also disclose the ratio between chief executive officer pay and that of the general workforce.

Listed organisations have additional obligations under the UK Corporate Governance Code, which operates on a ‘comply or explain’ basis, meaning if they do not comply they must explain why not. Employers must include in their annual report an explanation of how executive remuneration is appropriate, using internal and external measures including pay ratios and pay gaps.

Organisations must also describe what engagement with the workforce has taken place to explain how executive remuneration aligns with wider pay policy. A specific method or methods of engaging with the workforce must be set up, such as through a designated non-executive director or a formal workforce advisory panel.

So, pay arrangements and views of the wider workforce are going to be much more important in future, both in themselves and as a benchmark against which to measure executive director pay.

All-employee share plans, as well as widely-based annual bonus and commission arrangements, will assume much more importance for reporting and comparison purposes.

Although it is early days, those organisations that do not have all-employee arrangements may come under pressure to implement them as a means of addressing some of the questions that will arise from these annual reports.

Group reward managers need to be prepared for these changes. Throughout 2019, they should work to draw together data and justifications, set up processes and alert decision-makers of any deficiencies or difficulties.

This is so that employers are not surprised by what has to be disclosed in 2020; by then, it will be too late to make any changes for 2019 reporting purposes.

Nicholas Stretch is head of the incentives practice at Ashurst