Pay ratio reporting – not a case of ‘one size fits all’

As you may have seen in the news, for the very first time data has been published on pay ratios in line with new rules requiring listed companies with over 250 UK employees to disclose their CEO’s pay relative to the rest of the workforce. It has been widely covered in the national and HR press. The Guardian quotes the unions who, unsurprisingly, call the pay gap between executives and workers 'obscene', and singled out Ocado. The online supermarket, had the biggest pay gap between those at the top and those on the shop floor. As you might expect, the data shows biggest gaps are in the retail sector, with the smallest in financial services where the structure is completely different. Personnel Today looks at the broader picture highlighting how the average FTSE 350 CEO earns 53 times more than median employee. The CIPD covers this too and warns employers not to treat new CEO pay reporting requirements as a tick-box exercise. It quotes its own CEO, Peter Cheese, who says ‘greater fairness and openness in pay is essential in building trust, amongst employees as well as external stakeholders and investors’. The data stems from analysis carried out by the High Pay Centre based on the very first batch of pay ratio disclosures required under regulations brought in last year. The report was published in December and our rewards team has been looking at it closely, especially the recommendations for action.  I discussed all this with one of the team, Nicky Griffin, who joined me by video link from her home in Oxford:

Nicky Griffin: "Thanks Joe. Well just by way of background, all companies that are listed on the main market, the London Stock Exchange, who have got more than 250 employees were required to publish the CEO pay ratios in respect of years that began on after 1 January 2019, so we saw them coming through at the AGMs in 2020 and this is a really great report because unlike the gender pay gap report where there's a central register where you can go and see what other companies have done, there's no central register for CEO pay ratio reporting so it's great that the High Pay Centre has bought this all together in one place. So there's some really interesting, although perhaps not surprising, findings. So when we look at the top 10, in terms of CEO pay ratios, it's dominated by the retail sector and actually it's in the retail sector we found the greatest disparity. So if you contrast that financial services sector that has the lowest disparity between CEO pay ratios and employees at the median, then we can see that, actually, there is a huge gap here. We were expecting there to be an awful lot of press commentary around this as CEO pay ratios were published for the first time last year but obviously the press had other things on the mind and obviously COVID overtook that. So I think it's a great starting point for companies to look at when they're looking at their CEO pay ratio reporting for the financial year that has just ended at their AGMs in 2021."

Joe Glavina: “I see the report includes a number of recommendations. I counted thirteen”

Nicky Griffin: "Yes it has Joe, it has made a number of recommendations and I think the key one, which is a recommendation which comes out of one of the points they make around the report, which is actually this is probably under reporting. An awful lot of low paid workers are actually not employed directly by the company and the businesses they work in. So for example, catering, cleaning security in businesses is often contracted out, so one of their recommendations is that actually it includes not only direct employees but also workers, people who work in the business but may be employed by another entity, to give a truer idea of the CEO to worker pay ratio. Also, and the other recommendation they've made, is around the companies which are in scope. Currently, as I said, it's only main market companies listed on Stock Exchange with over 250 employees but they're saying that actually it shouldn't just be main market or AIM companies but also there's larger private companies as well and they see no real differentiation between a listed company and a private company that is a reasonably large employer. Then I guess, finally, one of the recommendations is that actually not only is it in their public documents, that actually, employees are told individually, the workforce has a presentation each year, so that they can understand how their own salary and pay fits into the ratio within the workplace. So they can make their own decisions about whether they consider what they are earning is fair.”

Joe Glavina: “Can I ask you about the narrative because this reminds me of gender pay gap reporting where, of course, the narrative is vital to give the data context. Is that right?"

Nicky Griffin: "Yes absolutely, the narrative is key because the numbers on their own are relatively meaningless and they can actually in some situations be quite shocking. You need to be able to put it into the context so absolutely HR have got a role here and as with the gender pay gap reporting it's going to be looking at that sort of year on year change as well. So for most companies, their AGM 2021 is going to be the second time they've been required to report under this legislation and actually the narrative to show changes and to recognise where they think there is an issue, or to justify the situation if they think there isn't an issue. So yes, the narrative is absolutely key and there is not a one size fits all, you've got to look at what the specifics are in your business and what's driving those ratios and you know, frankly, if you think that they're acceptable then you need to explain why, but if you think they aren't then you need to explain what, what procedures, what programmes are going to put in place to address that disparity.”

Joe Glavina: “Final question, Nicky. What's HR’s role in that? Presumably around collecting the data and liaising with stakeholders within the business?"

Nicky Griffin: "Yes, so absolutely both of these things. So clearly, getting the data together is a huge issue and it was certainly an enormous issue last year, when it was the first time. It's going to be even more of a challenge this year in some businesses obviously. We've had the Furlough Scheme, we've had CEOs taking pay cuts in some circumstances, it's not necessarily going to be as straightforward as it might otherwise have been, if we hadn't had COVID, producing these figures the second time around, we've got extra things we need to think about. So there remains a really big job for HR in the data, but also guiding that narrative to explain those overall pay policies and how you've ended up with the figures that you've got.”

If you would like to read for yourself that report by the High Pay Centre you can. It is called ‘Pay ratios and the FTSE 350 – an analysis of the first disclosures’. We have put a link to it in the transcript of this programme.

LINKS

- Link to report by High Pay Centre