New regulations have been established for businesses with regards to CEO’s disclosing their salaries and this has created several implications with regards to how companies share CEO pay and also compare with other employees pay.
Regulations that apply in respect to financial years starting on or after 1st January 2019 mean that certain companies with 250 or more employees are now required to disclose how much their CEO is paid in relation to other employees pay, this is required to be done every year.
The change in the law and regulations was prompted due to the concerns surrounding that fact that some CEO’s pay is out of step with company performance, and is, therefore, part of an increasing trend which requires transparency around salaries. The government anticipates that the changes in regulation (part of a large restructuring within the corporate world) will “hold big businesses to account for the salaries they pay while giving employees a greater voice in the boardroom”.
Impacted companies will have to produce a remuneration report for their CEO’s and highlight their remuneration in comparison to the other employees. The remuneration report must include every single element that can contribute to a CEOs pay, such as bonuses, fees, share schemes and salary. The obligation to include all elements of remuneration could cause confusion in certain ways, for example, if a long-term incentive is reached in that year or if share value has increased.
In order to calculate the remuneration ratio, companies will have three options. However, it is Option A that provides companies with the most accurate method of calculation for their CEO pay report. Therefore, companies are heavily encouraged to use Option A in order to provide full clarity for the comparison to be fair. When choosing the option of how to calculate the ratio, the company must state which option it has used and also the reasoning behind the choice.
The new regulations require that the findings are set out in the director’s remuneration report. The thought is that the table will be added to every year and eventually paint a picture over a ten year period, enabling comparisons to be made. Alongside the table, it is necessary for the directors to make comment and explain what has been found which may provide clarity over certain situations.
In terms of the companies, the main concern for them is the published ratio and report will be perceived by potential investors and employees and whether there will be any negative PR consequences following the publishing of the report.
It is anticipated that over time more and more companies (and not just large listed companies) could be required to comply with the executive pay transparency requirements.
What its effects will be and whether it will drive change remain to be seen.
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