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High Pay Centre analysis of the first pay ratio reports: what conclusions can we draw?

  • United Kingdom
  • Employment law
  • Financial institutions

30-06-2020

The High Pay Centre has published analysis of the first 107 FTSE 350 pay ratio reports made between 1 January and 31 April 2020 under the Companies (Miscellaneous Reporting) Regulations 2018. First mandatory disclosures have started to appear in annual reports published in 2020 for financial years ending on or after 31 December 2019.

In our earlier briefing on executive pay and rewards in light of COVID-19 we looked at issues such as reputation, investor expectations and governance which come to the fore when considering pay ratios and executive pay more generally:

Indeed, recent media reports have highlighted cases of investor revolt over substantial pay awards, suggesting a renewed focus on executive remuneration with public scrutiny being brought to bear in cases of apparent unwarranted excess. In light of the COVID-19 pandemic, stakeholders will understandably be looking to companies to exercise restraint when setting executive pay.

The High Pay Centre analysis sheds some light on what CEO pay ratios presently look like within FTSE 350 companies and notes certain trends whilst also highlighting some of the factors that explain some of those larger ratios.

Reasons for differentials

The analysis considers some of the reasons for the CEO/ median worker pay differentials, which include, for example:

  • the banking sector, which has large numbers of customer-facing staff, has an average CEO/ lower quartile ratio of 146:1 whereas the financial services and insurance sectors, which consist of predominantly specialist or analytical roles, have a much lower quartile of 50:1. Four out of ten companies with the highest threshold for their lowest quartile of employees are in the financial services sector, where many people are employed in analytical roles requiring high levels of education and training
  • the healthcare industry, which has the highest average CEO/ median ratio at 129:1 as a result of high CEO pay within the industry, influenced by factors such as high market capitalisation and share price rises
  • similar companies within the same industry can have very different pay ratios as a result of different employment models. For example, Shell’s pay ratios are lower than BP’s because BP operates its petrol stations directly, including low paid retail workers in the calculation whereas Shell franchises its petrol stations so that those workers are not included in the pay ratio

The fact that contracted workers are not included in the reporting figures should also be noted. In some industries, many functions are outsourced, such as facilities management, maintenance, Information Technology, cleaning and other support functions. Stakeholders will look at employment practices in the round, including those who primarily work for a company whilst not being employed by them.

Lowest and highest pay ratios

Across the FTSE 350, the median CEO/ median employee pay ratio is 55:1 and the median CEO/lower quartile employee ratio is 78:1. For the FTSE 100, the figures are 74:1 and 109:1 respectively.

The analysis notes the relevance of size; most of the companies with the lowest pay ratios are FTSE 250 companies and those with higher ratios are mainly from the FTSE 100 companies. At the same time, the centre warns against an assumption that large pay differentials are necessarily evidence of bad practice, given that there may other factors affecting the pay ratio.

Whilst noting that the sample sizes are small at this stage, the research indicates that the healthcare industry has the highest average CEO/ median ratio at 129:1. The centre posits a relationship between lower pay ratios and trade union membership, noting that union membership across industrial companies is higher than the private sector, which may contribute to lower pay ratios in those sectors (e.g. aerospace and defence and automobiles and parts).

Narrative reporting

The analysis also looks at narrative reporting but finds that whilst this is an important requirement, the disclosures that have been made so far are ‘rarely substantial’ and many companies appear to be using standardised text to justify pay ratios. This suggests that consultants advising on remuneration reports are re-producing similar justificatory text, which can be problematic for organisations which are not providing a reasoned analysis as to why their CEO/ median worker pay differential is significant.

Firms who have not yet published their pay ratios are advised to give this section more considered attention.

High Pay Centre recommendations

The High Pay Centre analysis argues that re-thinking pay within top companies could facilitate a post pandemic pay rise to the lowest paid workers and suggests that companies be held to account over pay practices. The centre notes that re-distributing CEO pay awards across the workforce would make little difference; however substantial pay redistribution from top earners generally would have a positive impact on lower earners. The centre argues that quite minor rebalancing of pay awards from those in the top quarter to those in the bottom could yield substantial pay increases for the latter group.

In particular, the centre notes that companies drawing on the Coronavirus Job Retention Scheme (CJRS) and the Coronavirus Corporate Financing Facility (CCFF) should commit to fair pay practices. Thirty-nine companies in the High Pay Centre sample are using the CJRS or CCFF, of which the median CEO/ lower quartile ratio is 78:1.

Of course, with six months to go before the end of the year, many remuneration reports are still not in but the High Pay Centre has committed to monitor pay ratio disclosures and will publish a full analysis of a complete set of annual reports for the FTSE 350.

View Analysis of 2020 pay ratio disclosures (interim report)