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Jury’s out over CEO pay ratio disclosure

Alex Beidas
civil

Theresa May first announced the Government’s intention to require this disclosure back in 2016. Since then, there has been much debate about the benefits – if any – of such a disclosure, and its dangers: companies with highly-remunerated staff, those which have chosen not to manufacture goods in the UK, or those which contract-out many services, will fare better than others. Contributor Alex Beidas, Partner Linklaters.

There may also be unfair comparisons drawn between companies in different sectors and of different sizes. Because the Government is focused on fairness in the UK, the disclosure is limited to UK employees’ pay, and to groups with more than 250 employees.

The scepticism about the usefulness of such ratio disclosure is likely to persist:  US public companies have this year published, for the first time, the ratio of CEO: median employee pay. US companies have considerable flexibility to calculate the employee figures (they can exclude a proportion of the workforce and choose the methodology and date for the employees’ pay), and this may have robbed their disclosures of much meaning.

Since 2013 UK companies have had to disclose each year the percentage changes in CEO pay and group employees’ pay from the previous year. But this has not had the desired effect – some companies chose to compare against senior employees only, and were heavily criticised.

So the jury is out on whether this new ratio disclosure will be of any use to investors. There may be more rebellion over levels of executive pay, and more pressure on remuneration committees to explain their overall approach on pay – they will have to do this anyway under the new Corporate Governance Code, due out this summer.”

Executive pay: share price impact on potential pay-outs

The Government is focused on situations where executives receive large pay-outs from their awards, largely due to share price increases unforeseen at the time they got the awards. There is also an increasing belief that when shareholders vote for pay polices they don’t necessarily understand the potential size of the ultimate pay-outs.  But showing share price increases may strike many as unrealistic, and only stoking the fire of condemnation. There is no doubt that this requirement is a significant change.

Executive pay: share price impact on actual pay-outs

The Government has been focused on the role of share-based payments and their link to performance. These new rules may well increase pressure on remuneration committees to exercise discretion, for example to reduce awards where pay-outs do not reflect the underlying performance of the company.

It is also clear that there will be increased pressure on remuneration committees, when setting levels of variable pay awards and assessing what’s justifiable to pay out. It could be tricky to manage investors’ expectations here. They must also ensure that they have the right powers to adjust pay-outs, without risk of dis-incentivising or opening themselves up to claims from disgruntled executives.


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