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Although the 12 Days of Christmas have only just elapsed it appears that many high earning Executives will have already made more money than the average annual salary in the UK. The High Pay Centre has reported that the CEOs of the UK’s FTSE 100 companies will have earned the average UK salary of £28,200, by the first Wednesday of 2017 i.e. just 2.5 working days into the New Year.

The ratio of the average FTSE 100 CEO salary to the average full-time employee in the UK in 2015 was reportedly 129:1. Although perhaps not the most pleasing information to read on returning to work after the festive break, it is a significant reminder of the growing pay gap that we are facing in the UK. 

The HPC is calling for the pay ratio between the highest and average earner within a company to be made public in circumstance where it is suggested that the pay gap is de-motivating for ordinary workers who may form part of that recently identified category of “JAMS” –those who are just about managing.

While running for the leadership of the Conservative party Theresa May vowed to tackle excessive pay and proposed to put workers on the board of directors of companies. While, on taking office as Prime Minister, she appears to have stepped back from the latter position it is still apparently intended to address the issues of pay transparency and corporate accountability in order to help ensure that the UK has an economy that “works for everyone”. In the aftermath of the collapse of high street giant, British Home Stores, the Prime Minister put forward a Green Paper on reform of corporate governance within UK companies. Although the focus is not the issue of pay inequality the paper sets out various proposals including the introduction of pay ratio reporting.

The proposals would place obligations on the UK’s largest companies to disclose the pay ratios of their highest earning executives to their wider workforces. Undoubtedly this would put pressure on company boards to provide a justification of the resulting figures to shareholders particularly if this does not appear to be merited by the performance of the company or the executives themselves.

At first glance the publication of such ratios may seem appealing allowing comparisons to be made between companies in the same sector but there is potential for ratios to be misleading when taken out of context. The ratios would potentially reflect poorly on those companies being compared across different sectors. For example, supermarket retailers generally have a larger portion of lower earning employees which would be likely to yield a starker ratio when compared to e.g. financial services companies where average salaries are generally higher. In both cases while the CEO salary may be particularly high the ratio will be less forgiving for the retailer.

There is no doubt that the publication of ratios would also allow for scrutiny by shareholders, employees, the general public and may even shame companies into taking action. However crude pay ratios may fail to reflect other employee benefits such as company cars, health benefits and maternity benefit or opportunities for flexible working, for example. Consequently companies may feel the need to increase their employees’ salaries and reduce their non-pay related benefits to improve their ratio. In addition, it has been suggested that counter–productive and perverse outcomes could result as companies may potentially dismiss their lowest paid employees and instead seek to engage (even lower paid) agency workers or to offshore activities (thus exporting jobs) in order to manipulate the ratio.
In addition there are concerns that the pay gap between ordinary workers and executives may increase in 2017 due to the uncertainty surrounding Brexit and resultant hesitation of employers to increase their employees’ wages. It appears clear that the issue of corporate accountability and pay inequality in particular is not going away however, whether the proposals put forward by May will effectively tackle this or indeed ever be implemented remains to be seen.

The Government’s consultation is open to receive responses until 17 February 2017 via theGOV.UKwebsite. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/573120/beis-16-56-corporate-governance-reform-green-paper.pdfhttps:

For further information on this topic please contact a member of our Employment Law Team who would like to wish all clients and contacts a very happy new year.

Eric Gilligan, partner, and Jemma Forrest, trainee solicitor

 

Chambers UK 2018

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