Exec pay: Government introduces new transparency measures

29 August 2017 -

Publicly listed UK businesses will be required to publish the pay ratio between their chief executive and their average British worker under the initiative

Matt Scott

From next June, UK listed companies will need to publish more transparent information on executive pay.

Businesses will be obliged to publish the pay ratio between their CEO and the average worker in their UK workforce in a shake-up of the country’s corporate governance rules.

Greg Clark, the business secretary, said: “One of Britain’s biggest assets in competing in the global economy is our deserved reputation for being a dependable and confident place in which to do business. Our legal system, our framework of company law and our standards of corporate governance have long been admired around the world.

“We have maintained such a reputation by keeping our corporate governance framework under review. Today’s reforms will build on our strong reputation and ensure our largest companies are more transparent and accountable to their employees and shareholders.”

Patrick Woodman, head of research and advocacy for CMI, said: “We welcome the Government’s plans to introduce transparency in the reporting of executive pay. We need to see fairer ratios between CEO and average pay, as well as stronger remuneration committees who make sure that executive pay packages are based on long-term evaluation of performance.

“High-profile cases of runaway executive pay and ‘rewards for failure’ have broken down trust in business. Greater transparency about executive pay will help drive change.”

CMI’s own Management Manifesto, launched in the run up to the general election, reiterated the importance of rebuilding trust, and the importance executive pay plays in this.

“The Edelman Trust Barometer reported its biggest-ever drop in trust in government, business, the media and NGOs in 2017,” the report said. “Many people are concerned by runaway executive pay and perceived ‘rewards for failure’.

“Trust has also broken down inside organisations. Only 36% of middle managers fully trust their leaders. Those middle managers are at the heart of organisations, playing a pivotal role in engaging employees and turning strategy into action, yet just 31% feel the importance of their role in building trust is valued by their leaders.”

“Rewards for failure need to be stopped by reinforcing the links to performance,” the report added. “Leaders should be measured on how they deliver company purpose and their commitments to stakeholders including customers, employees, and communities.”

Businesses will also be asked to assign a non-executive director to represent employees, create an employee advisory council or nominate a director from the workforce, under the new code.

This aspect of the change will be under a ‘comply or explain’ basis, however, meaning businesses can side-step the ruling for employee representation if they explain their reasoning for doing so. This has drawn criticism from many for its watering down of the Government’s original plans.

Shadow business secretary Rebecca Long-Bailey said: “The Tory plan is a fraud, watering down a promise to increase workers’ voices to a lone representative on the board of directors or a separate employee advisory council. Each of these will be easily outvoted or ignored.

“The Tories seem to believe fixing Britain’s broken system of corporate governance, which not only leads to scandals like BHS, extreme executive pay, but also growing inequality and stagnating wages, is just a matter of changing one or two nameplates around the boardroom table.”