CEO / worker pay ratio will leave firms open to criticism without reducing inequality, our poll finds

The obligation to publish the pay ratio between chief executives and their average UK workers is unlikely to reduce pay inequality, but is likely to be used to unfairly criticise companies, our poll out this week in conjunction with the ICSA: The Governance Institute finds.

Fifty five per cent of company secretaries polled feel that the obligation to report on pay will not reduce inequality. Only 13% feel that it will help and 32% are undecided. When asked if the published pay ratios would be used to unfairly criticise companies, 61% answered ‘yes’, 22% answered ‘no’ and a further 17% are unsure.

Summarising the findings, Simon Osborne, Chief Executive at ICSA: The Governance Institute says: ‘A comparison between CEO and average worker pay is meaningless without a good understanding of the demography of a company. A large multinational retailer with a high number of unskilled workers is likely to have a higher ratio than a relatively small professional services company with a large number of highly skilled professional employees. A ratio that does not recognise the difference in skills employed by different companies will be like comparing apples with oranges.’

Many respondents worry that pay ratios will be misconstrued. There are concerns that the media will use the figures to generate sensationalist headlines, but that the full context will not be provided. One respondent goes so far as to say that the ‘media are running a very left-wing and anti-business agenda.’

Another concern is that the ratio will further drive outsourcing of low paid/low skilled roles from companies to outsource providers, reducing perceived inequality but allowing companies to ‘divorce’ themselves from responsibilities for those who provide these roles on their behalf.

Suggestions vary as to what information companies should publish about pay, including:

  • ‘More information about the rest of the workforce – what benefits are offered, what percentage of the workforce gets a bonus, does the company offer flexible benefits, what percentage work flexible hours, what is the gender pay gap and what is being done to address that. That would put executive pay into context.’
  • ‘Annual and monthly salary; share options; percentage performance rewards; percentage difference between their pay and lowest and highest paid employees.’
  • ‘Pay relative to performance of company and shareholder returns, and pay increases relative to company average.’
  • ‘Details of pay bandings and/or technical skills levels associated with those bandings, number of people within each band (split male/female) and a ratio which clearly shows the difference between each banding and the CEO.’
  • ‘Where this has been reclaimed/not paid out for failure to reach targets.’

There is some dispute as to whether or not Britain suffers from an ‘excessive pay’ problem. ‘Whether pay is excessive depends on how you define excessive and I am not sure that anyone is prepared to grapple with that,’ one person said. While some people feel that pay has to reflect the need to attract international talent, others feel that it is excessive, but not just in the corporate world: ‘Nobody bats an eye at the obscene pay received by professional footballers’ and ‘Media reporting is driving opinion – why for example is it acceptable for a footballer to earn the levels they do but not a CEO running a successful multi million pound company generating significant employment and revenue for HMRC.’

‘What is clear from the responses is that if the aim is to bring average pay up or CEO pay down, neither are easily achievable and both would have ramifications. Transparency of disclosure can have the unintended consequence of pushing up the benchmark, but it will be interesting to see if this obligation has any impact on how companies structure their pay overall. If nothing else, it is likely to force companies to take more notice of the fairness of their pay policies, including considering if there is gender and ethnic inequality. That can only be a good thing,’ concludes Simon.

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