Does your firm have a big CEO pay gap? From this year, large companies will need to start reporting – publicly – what their top boss is earning and how it compares to the rest of their staff.
That’s thanks to the Companies (Miscellaneous Reporting) Regulations 2018 which are coming into play, and if your company has 250 or more employees it’s going to affect you. Here’s what you need to know.
Who does it affect?
Quoted companies with an average of 250 or more UK employees will need to report their CEO pay gap, and explain it.
Community interest companies (CICs) must report on their directors’ remuneration too, regardless of company size, but they don’t need to report it as a ratio.
The requirement applies to any company reporting on financial years starting on or after 1 January 2019. Reports will be submitted in 2020.
What you need to report
You need to disclose the ratio of your CEO’s total annual remuneration to:
- the median (50th percentile) full-time equivalent (FTE) remuneration of your UK employees
- the 25th percentile FTE remuneration of your UK employees
- the 75th percentile FTE remuneration of your UK employees
For instance, if 25% of your workforce earns under £30,000 and your CEO earns £6 million, the pay gap would be 1:200.
The government has issued a set of simple rules to follow for calculating the gap, which you can read in their guide here.
But as well as reporting the ratio, you also need to explain it. Why does your CEO have a pay packet that size, compared to your lower-salaried employees?
Specifically, GOV.uk says, you need to explain ‘whether, and if so why, the company believes that its median pay ratio for that year is consistent with the company’s wider pay, reward and progression.’
If the company is doing well, all staff are fairly compensated, and top pay is in line with standards and benchmarks in the sector, this should be fairly straightforward. If not… your shareholders (and customers) may have some awkward questions for you.
Why report CEO pay gaps?
It’s a way of holding companies accountable for how they pay their staff.
As the Financial Times put it, CEO pay gap reporting is ‘part of a push by the government to address public anger over corporate behaviour… and reflect Theresa May’s call for responsible capitalism’.
Business secretary Greg Clark 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.
‘Most of the UK’s largest companies get their business practices right but we understand the anger of workers and shareholders when bosses’ pay is out of step with company performance.’
Financially responsible companies have nothing to worry about. But with pay gap reports publicly available, it will be more transparent for both shareholders and customers to see where their money is going.
For more info on the reporting requirement, see our article: Get ready to report your CEO pay gap.
And for detailed guidance on how to calculate and report it, see the GOV.uk guide here.
Croner-i subscriber? You can also see the legislation itself here in your legislation tracker.