Pay ratios to become mandatory

Written by Rebecca O'Connor on 29th Aug 2017

Listed companies will have to disclose the gap between the highest and average paid employees, under Government reforms announced today.

As part of proposals that represent one of the biggest government interventions in corporate governance, Greg Clark, business secretary, also published plans for a public register of listed companies that face opposition to executive pay from at least 20 per cent of their shareholders. Companies will have to give details of how they plan to address these concerns.

The register will be created by the Investment Association, which represents fund management firms.

Fund managers, including pension funds, which manage trillions of savers long-term investments, have become increasingly concerned about the effect of excessive pay and poor boardroom practices on company performance and returns.

Nearly 9 in 10 (86 per cent) pension funds said they believe that executive pay in listed companies is too high, according to research also published today.

The research, from the Pensions and Lifetime Savings Association (PLSA), found that 84 per cent of funds are “concerned” that many chief executives of listed companies receive “excessive” pay.

Greg Clark, business secretary, said: “Most companies are proactive and thoughtful when it comes to responsible business practices. But there are a small minority of firms that threaten the reputation of business with their behaviour, including ignoring shareholders’ concerns about executive pay packages.

“This first-ever register will help shareholders to publicly hold these companies to account.”

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Chris Cummings, chief executive of the Investment Association, said: “The creation of the public register on shareholder voting is an important step in increasing accountability and transparency of those listed companies that see significant shareholder rebellions during the AGM season.

“Our members, who manage the pensions of 75 per cent of UK households and own over one third of the FTSE, believe that not all company boards that receive big shareholder dissent are currently doing enough to address investor concerns. This public register will help sharpen the focus on the those who must do more, enabling our members to hold the country’s biggest businesses to account and leading to better-run companies.

“We look forward to working with Government to deliver the public register and aim to launch it later this Autumn.”

Stefan Stern, director of the High Pay Centre, a think-tank, said: “We want investors and boards to have a more constructive and more thoughtful conversation on executive pay, and this sort of public disclosure should help.

“This is a step in the right direction, providing greater transparency and focusing the public’s attention on those companies who ignore the concerns of their shareholders.”


Luke Hildyard, stewardship and corporate governance policy lead at the PLSA, said: “Workplace pension schemes represent the interests of almost 20 million active members across the UK and invest trillions of pounds into the economy – they are some of the most long-term and engaged shareholders that companies have.

“It is clear that they are extremely uncomfortable with the executive pay culture that has taken hold across corporate Britain with the vast majority voicing concerns over the pay gap and executive pay in listed companies.

“We are hopeful that this week’s announcement from the Government will be a concrete step forward which will see a more measured and transparent approach to executive pay.”

Not all investors agree that more needs to be done to tackle the issue. Mike Fox, Head of Sustainable Investments at Royal London Asset Management said: “We welcome the attention that the Government has given to corporate governance issues and executive pay, however any new measures that are introduced need to add value to what is already in place. The current system does seem to be working: shareholders have become more proactive, the vast majority of companies have responded appropriately and this is the key reason why chief executive pay has fallen by almost 20 per cent this year.

“We are pleased to see that the Government has introduced flexibility to get companies to increase diversity and representation in the boardroom, realising that employee representation is not a one-size-fits all solution.

“On the other hand, we don’t think that forcing listed companies to reveal the pay ratio between bosses and workers will be meaningful. It will show large discrepancies between sectors depending on the nature of the workforce and the results could easily be manipulated.”

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