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CEO/employee pay ratio reporting to be introduced

CEO/employee pay ratio reporting to be introduced

Listed companies with 250 or more employees will be required to publish and justify the difference between CEO and staff pay.

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Colin Ben-Nathan

Director

KPMG in the UK

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Also on home.kpmg

Listed companies with 250 or more employees will be required to publish the ratio between CEO remuneration and the remuneration of employees in the 25th, 50th and 75th percentile of the workforce, and justify the ratios.

Hot on the heels of Gender Pay Gap reporting obligations introduced in 2017, draft regulations have been laid before Parliament which include a requirement for listed companies with more than 250 UK employees (within the company itself or the corporate group) to publish a comparison of the remuneration received by their CEO with that of other employees.

The government initially proposed this in its response to a consultation on corporate governance reform last year, and the regulations are part of a number of reforms intended to increase transparency concerning pay in the workplace. Subject to Parliamentary approval, the Draft Regulations will come into force in January 2019 and reporting will commence in 2020.

What will be reported?

Employers caught by the obligation will be required to calculate relevant figures for the employee whose pay and benefits are on the 25th, 50th and 75th percentile within the company. These figures will then be compared to the figure for pay and benefits for the CEO (or equivalent).

The draft regulations envisage that the calculations could be undertaken in one of several ways (which may make it hard to compare like for like). One methodology envisaged is that companies leverage the calculations they are required to carry out for Gender Pay Gap reporting requirements (although they do not have to).

However, the calculations which are required for this purpose may be considerably wider in terms of the types of remuneration and employee populations to be included in the calculation. In particular, if the listed company is a parent company, UK employees of all companies in the group will be included in calculations. Gender Pay Gap reporting obligations, by contrast, require publication on an entity by entity basis.

Justifying the ratios

As well as publishing the ratios in the directors’ remuneration report in that year, companies will also be required to publish figures for up to the previous nine years.

Companies will also be required to publish a statement explaining:

  1. How the calculations have been carried out;
  2. The reason for any year-on-year change; and
  3. Why “the company believes the median pay ratio for the relevant financial year is consistent with the pay, reward and progression policies for the company’s UK employees taken as a whole”.

This is another distinction from the Gender Pay Gap reporting obligations, which do not compel a company to give any explanation for their figures (although in practice most employers did so voluntarily).

What next?

The draft regulations are still subject to parliamentary approval, so there could be some amendment or refinement to the final regulations.

However, employers should start thinking in advance about how they will approach this issue. In particular, employers may want to build this into or consider this alongside their work preparing Gender Pay Gap calculations.

The calculations for these regulations are likely to require analysis of a different set of pay components and a different employee population compared to Gender Pay Gap. However, the two sets of calculations will have considerable overlap.

Employers may also want to consider carrying out some provisional calculations in advance of the regulations coming into force to understand what their ratios might look like, as well as their explanations for the differential.

If you have any queries please get in touch with Donna Sharp, Director of Legal Services at KPMG in the UK, your normal contact, or e-mail employersclub@kpmg.co.uk.

© 2021 KPMG LLP a UK limited liability partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

For more detail about the structure of the KPMG global organisation please visit https://home.kpmg/governance.

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