It's becoming increasingly likely that UK companies will soon be required to provide the pay ratios between their CEOs and average employees. In anticipation of this, some of the latest remuneration reports analysed by E-reward in recent months have voluntarily provided this information, or at least made reference to future disclosure in this area.
Below we provide a few examples we uncovered during E-reward's ongoing monitoring of annual remuneration reports. Based on our own research last year [PDF] we found that median ratios in the FTSE 100 and mid-250 stood at 106:1 and 41:1 respectively – illustrating that those companies now voluntarily disclosing information, perhaps unsurprisingly, are at the lower end of the scale. In addition, as we argued in our article, pay ratios can be influenced by a number of factors as well as CEO pay so the context found in each company needs to be explained.
This is the case at Mitchells & Butlers. It comments that ratios will be influenced by levels of employee pay and in the hospitality sector average salaries are typically lower than in other sectors of the economy. Compass Group also mentions the complexity of such a comparison in a company with over half a million staff in 50 countries. A number of the companies also added that it is not policy to apply fixed ratios between CEO or any other groups of staff in their organisations mainly because it would create difficulties with recruitment and retention.
What was published:
Ratio of CEO pay to average pay of two groups: Group management board and all employees.
Group management board CEO ratio 2.8:1 (3.4:1 in 2015)
All employees CEO ratio 20.6:1 (32.1:1 in 2015).
The committee does not seek to apply fixed ratios between pay levels of different roles in the group, as this would restrict flexibility in aligning reward and achievement, and potentially create barriers to recruiting and retaining the necessary talents in the highly competitive employment environment. However, in considering base salary reviews and variable pay awards for executives, the committee considers the rates of increase, and movement in variable pay for the groups wider employee population.
The remuneration committee does not seek to apply fixed ratios between the total remuneration levels of different roles in the company, as this would prevent it from recruiting and retaining the necessary talent in a highly competitive employment market. However, the base salary multiple between highest and lowest paid UK-based employees in the company is less than 4.5x.
We acknowledge a growing desire for companies to disclose pay ratios. We are committed to such a disclosure, albeit that creating a meaningful disclosure with more than 500,000 employees across 50 countries is complex.
In line with emerging best practice the committee has decided to include the pay ratio between the CEO, and the median pay of other employees. Based on the CEO single figure set out on page 74 the ratio of pay to the median of all other employees is 44:1. Employee pay includes base salary, incentive payments, employer’s pension contributions and benefits. Employees with part-year service have been excluded from the comparison figures.
In assessing our pay ratio versus likely ratios from industry peers, we believe that we are towards the lower end of the range but note that annual and long-term incentive payments have varied considerably amongst this group. In our example, the CEO single figure comprises fixed pay only given that no bonus was awarded and no long-term incentive was capable of vesting in respect of performance in FY 2016. We also recognise that ratios will be influenced by levels of employee pay and in the hospitality sector, despite significant increases over the past year, employee pay will be lower than in other sectors of the economy.
We have provided this additional disclosure but look forward to greater debate and clarification over the method of calculation and how this additional information will inform discussion on executive remuneration.
Publication of CEO earnings versus the average employee earnings as a pay ratio.
CEO earnings = £1,696,000, average pay = £39,990 translating to a ratio of 42:1.
The CEO’s earnings are calculated on the same basis as the single figure in the main remuneration table.
Average employee earnings are based on staffing costs calculated on the same basis as note 8.1 of the accounts, excluding social security costs.