06 Dec 2018
From January 1, UK listed companies must report the pay gap between their Chief Executives and average UK employees. Here’s why this matters for you…
For every £1 the average FTSE 100 company gave to an employee in 2017, its CEO got £145.
And that’s nothing compared to the biggest earners in the UK and around the world. In the finance and oil & gas sectors, CEOs can earn 1,000 times more than the rest of the workforce.
Which raises an important question: how do I become the CEO of a global oil & gas company?
Unfortunately, we can’t help you with that.
But we can show you why the new rules on executive pay reporting are making some of the UK’s top CEOs nervous.
And if you’re not affected by the new legislation, read on to find out how pay pitfalls could still impact your business in 2019…
What you need to report
Listed companies already publish data on executive pay each year. So it won’t be a shock to anyone to see that top CEOs are doing ok for themselves.
But how executive pay packets compare to regular workers remains a point of controversy.
Under new law, companies listed on the London Stock Exchange with an average of 250 or more staff must publish a comparison of their CEOs’ annual earnings to three employees.
This includes comparing your CEO to an employee in the bottom 25% of earners in your company. So if 25% of your workforce earns under £30,000 and you’re CEO earns £6 million, your pay gap might be 1:200.
The Government has published a set of rules to calculate the pay gap. CEOs must show that they have followed these rules when they submit their first reports in early 2020.
But doing the maths is the least of their worries...
Because CEOs now have to justify their pay
You don’t only have to state your CEO pay gap ratio. You need to justify it. This includes explaining:
“…why the company believes that its median pay ratio for that year is consistent with the company’s wider pay, reward and progression policies.” – Department for Business, Energy & Industrial Strategy, Corporate Governance FAQ
If you’re a listed company, you’ll face difficult questions if shareholders don’t think business performance justifies CEO pay. And if your customers feel like you’re not treating your workforce fairly, they may buy from someone else.
With each report, you need to compare the pay gap ratio to previous years. It’s likely your customers and shareholders will want to see the gap narrow. They’ll expect a good explanation if it widens…
Some of the UK’s top CEOs await a nail-biting year. But in many ways, it’s smaller companies who face a bigger risk from poor pay decisions in 2019.
Executive salary should deliver executive value
Whether your company is listed or not, you need to know you’re paying senior staff the right amount.
If you overpay for their role, your profits will suffer. If you underpay, they may leave and you’ll struggle to replace them. This can be damaging for a large company. It can be terminal for a smaller one.
That’s why successful businesses ‘benchmark’ executive pay. Benchmarking compares employees’ pay and benefits packages to competitors and businesses in similar sectors.
For listed companies, some data on earnings is publically available. But the information isn’t easy to read. Differences in bonuses, share schemes and other benefits make direct comparison difficult.
Meanwhile for smaller businesses, data on pay is harder to come by, and the risk of paying below or above market rate is greater.
Investing in good market analysis can help you to collect and interpret relevant pay data. You can use this to justify your pay choices and defend your business from unfair criticism. You can also use it to avoid staff jumping ship.
And don’t stop at the top. Success relies on hiring and retaining the best employees at all levels.
A salary review for your workforce can reveal if pay is right or if you risk losing top talent to competitors. If you plan to recruit in the new year, now’s the time to use a salary review to budget for new roles.
Need to report or review salaries?
There’s no getting away from it. Extra reporting is going to be an extra burden.
Call Croner on 01455 858 132. We do it for you.
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