CEOs earn more than average worker’s annual salary after 3 days in the office

Earning your average salary in 3 days...

January has in recent years been the month when CEO salaries make the headlines, with commentary focussing on the continuing disparity between earnings at the top, and against the average salary in the same organisation. Kevin Lau, Associate in our Employment team provides further insight.

Indeed, the BBC recently published an article citing CIPD research which reported that FTSE 100 CEOs will have earned more than the average annual salary of £29,559 by the end of their third working day in the new year, with their overall annual earnings coming in at around 117 times greater than the average salary.

In our corporate governance update (see here) in June 2018, and summary in January 2019 (see here), we reported on changes to company reporting requirements intended to improve the running of companies, protect shareholders, and to increase employee engagement. One of those changes was the introduction of a new requirement for certain companies to include statutory pay ratio tables as part of their annual reporting. As these pay ratio tables will be making their first appearance this year (see below), we will no doubt continue to hear further reports of pay disparity in companies for some time to come.

Pay Ratio Tables

The Companies (Miscellaneous Reporting) Regulations 2018 came into force at the beginning of 2019, and made a number of amendments to annual reporting practices, and to strengthen corporate governance. However, of most interest to the public at large, will be one particular change which requires certain quoted and traded companies (essentially large UK listed companies with more than 250 UK employees, which we shall refer to as "relevant companies") to include pay ratio tables in their director remuneration reports in relation to their financial years starting from 2019. Relevant companies will be required publish these pay ratios tables on an annual basis, eventually including information covering a ten year period by 2030.

Over the course of the next few months, as relevant companies file their annual reports for the financial year ending 2019-2020, we will begin to see the very first pay ratio tables for different companies, setting out the ratio of their CEO's pay against the 25th, 50th, and 75th percentile of their UK employees' pay. Companies will also be required to provide a supporting narrative to include details such as an explanation of their chosen calculation method, reference dates, and any assumptions made, all of which should assist the reader to understand the figures provided.

Commentary

Whereas the debate surrounding top level pay against average salary is not a new one, the impact of the pay ratio tables will be felt for the first time this year, and 2020 will be the first time when actual ratios across a number of large companies (and sectors) will be made available as part of their annual reports.

Based on previously publicised pay ratios reported in the general media, we would expect the pay ratio between the top earner and the average earner to vary significantly across sectors. For example, within the retail sector, the Financial Times reported in 2016 (here) that the CEO's remuneration at the John Lewis Partnership was 75 times that of their average earner, which although was comparatively restrained within the sector, still represented a significant difference in pay. By contrast, one would expect the pay ratios to be less significant within sectors such as financial services, where even average earners are often relatively well remunerated.

In any event, the additional information in those pay ratio tables, when made available, will likely fuel the discussion further.

For more information, please contact Kevin Lau, Associate on [email protected] or +44 117 915 4974.