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Article:

Directors’ Remuneration Reports to include pay ratios from 2019

30 July 2018

In recent years, the pay packages of senior executives has become a contentious issue and company stakeholders are increasingly seeking information and justification from companies. The Government is addressing the issue by requiring increasing transparency in company reporting. New legislation means that, for accounting periods beginning on or after 1 January 2019, the Directors' Remuneration Report prepared by quoted companies will need to include ratios comparing the CEO's pay with that of the company's employees.

This new requirement applies to all companies that have more than 250 UK employees (including those employed by a subsidiary of the company) and have to prepare a statutory Directors’ Remuneration Report under the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.

 

Pay ratios

The report must in future include ratios comparing the CEO’s pay to the 25th, 50th and 75th percentile pay levels for employees. The legislation specifies three separate methodologies, one of which must be used to calculate the ratios. In the first year that the new rule applies, only one year’s pay ratio (for the reporting year in question) need be presented. However, over time, the disclosure will build up to a ten-year record of pay ratios.

The legislation requires narrative information to be provided to explain:

  • Why the company chose its preferred method for calculating the pay ratio for the year, certain specific information related to the ratio calculation methodologies used and an explanation for any change in the methodology used from the previous year.
  • Any reduction or increase in the pay ratio from year to year, including whether that increase or decrease is attributable to a change in CEO or employee pay, a change in employment models or a change in calculation methodology.
  • Any trend in the median pay ratio over the period covered by the ratio table (ie up to ten years).
  • Whether, and if so why, the company believes the median pay ratio for the year is consistent with the pay, reward and progression policies for the company’s UK employees taken as a whole.

 

Share based remuneration

In addition, the legislation also introduces a requirement for companies preparing a Directors’ Remuneration Report to disclose the impact of share price growth on share-based executive pay. The intention is to give shareholders greater understanding of how significant share price growth over an executive pay performance period can affect executive pay. This, in turn, is intended to encourage remuneration committees to consider, if appropriate, whether any discretion should be exercised to avoid mechanistic pay outcomes.

The Government has also published a useful Frequently Asked Questions document to help companies get to grips with these new requirements.

 

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