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The Financial Times today confirmed what we have long anticipated - Mrs May will require quoted UK companies to disclose the pay ratio of their CEO to their average employee.
Whilst we can’t yet say whether this new disclosure requirement will be helpful to investors and/or employee stakeholders, we do know that producing this seemingly simple figure will require significant time and resource. Precisely how time/resource intensive it will be will depend on a number of factors that are not yet known.
How prescriptive will the calculation methodology be?
Pay ratio disclosure will be more meaningful if companies are required to use a consistent methodology, as this will allow greater “like-for-like” comparison (particularly when analysed by industry). However, the more prescriptive the methodology, the more burdensome the new disclosure obligation will be for companies.
The number of methodology issues that will need to be addressed (either by regulators if methodology is prescribed, or by individual companies if left to their discretion) should not be underestimated. What “pay” is, and perhaps more importantly, how you value it, is not standardised – particularly where you are considering global workforces.
By way of example, for a large multi-national, the initial process of gathering the relevant pay data will be an enormous undertaking. Multiple payrolls using different codes and identifiers, part-time and part-year workers, employee relocations and international assignees, exceptional payments (such as for relocation, sign-on or settlement), foreign exchange impacts and varying share plan structures will all make it extremely challenging to collect standardised data that can then be analysed.
Will companies be able to leverage existing reporting obligations?
Quoted UK companies already need to quantify the “pay” of their CEO in any given year for remuneration report purposes. The regulations that govern remuneration report disclosure are reasonably prescriptive (and are audited financials), so in this respect there is already some consensus on how annual ‘pay’ is determined and quantified for directors. If the new pay ratio reporting requirement will be an annual report disclosure, it would at first blush seem to make sense to use the same disclosed pay figure for the CEO, and for consistency the same methodology to determine the ‘pay’ of employees. However, requiring companies to follow the same methodology as applies to directors for all employees would be an enormous undertaking – and potentially duplicative of efforts in some areas.
For example, in the UK regulations have been recently introduced under which companies need to annually quantify the ‘pay’ of their UK employees in order to determine and publish gender pay gap statistics. The methodology prescribed in the gender pay gap regulation is entirely different to that applicable to directors for remuneration report purposes. Other countries also have pay reporting requirements with which companies need to comply. If the new pay ration disclosure requirement will be global, it is therefore highly likely companies will need to analyse the same data multiple times, in varying ways, for varying purposes.
Who are a quoted company’s ‘employees’?
Perhaps most fundamentally, clarity will be needed on what is meant by ‘employees’. Determining whether a person is an employee is already a challenging task under UK law. If determinations will need to be made on a global basis (potentially by reference to local law status) this will be a significant project in its own right – particularly given many companies use a variety of service structures including agency workers and self-employed contractors/freelancers.
25 August 2017
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