Details are out for the forthcoming UK pay ratio requirement which borrows some of the framework for the recently implemented gender pay gap reporting requirements for UK-listed companies and even prescribes methods of calculation.
Although US companies may not have a direct interest in the UK’s pay ratio disclosure given the current US public company pay ratio requirements, the connection to gender pay equity and the additional reporting requirements aimed at involving employees as a key stakeholder go far beyond the current US requirements. These connections are something US companies will likely see pushed by shareholders which become familiar with the UK.
The requirements, which are detailed by Lewis Silkin's Colin Leckey, include:
Three Distinct Disclosure Requirements:
- CEO to the “25th percentile pay ratio”
- CEO to the median pay ratio
- CEO to the 75th percentile pay ratio
CEO pay will be defined in the same manner as in the UK’s directors’ remuneration report and must include all elements of compensation. Employee pay is defined as full-time equivalent pay and benefits.
Interestingly, the UK regulations will require the employers to calculate representative FTE employee pay for each percentile using one of the following three frameworks:
- Option A – Calculate pay and benefits for all UK employees for the year.
- Option B – Use most recent hourly gender pay gap information for all UK employees to identify three employees who the best equivalents to 25th, 50th, and 75th pay percentiles.
- Option C – Use other data to find the 25th, 50th, and 75th pay percentiles so long as the data is up to date and is not older than the most recent gender pay gap information.
The multiple compliance methods will allow companies to examine the outcomes to identify which provides the most valuable disclosure material. Companies will be required to disclose which option they selected and why or describe the methodology they developed internally. Companies will also be required to provide some narrative disclosure about year-over-year changes in the pay ratio and median employee compensation.
Finally, companies will be required to “justify” the CEO’s salary in light of the ratios and employee pay. This will include a requirement that “companies  report how much of a director’s pay award is attributable to share price growth, and extends the requirement to report on whether discretion has been exercised due to changes in share price.” The additional disclosure requirements addressing employee pay and stakeholder interests include:
- How the company is providing employees with information about issues important to employees.
- How the company consults with employees or their representatives on a regular basis to ensure that employee interests are considered in making decisions.
- How the company is encouraging employee involvement in company performance.
- How the company educates employees on financial and economic factors affecting the performance of the company;
The first pay ratio will be required to be reported in 2020.