Britain’s biggest listed companies will be forced to justify the pay gap between chief executives and their workforce as part of rules that come into force on New Year’s Day.
The pay-ratio regulations are part of government efforts to improve transparency around executive remuneration. They follow a string of investor revolts in 2018 over high pay for senior executives at companies including Royal Mail, Persimmon and Unilever.
Businesses will have to divulge and justify the difference between executive salaries and average annual pay for employees. They will also need to explain how directors take staff and other stakeholder interests into account when they decide on salaries and bonuses.
The regulations will make it a statutory requirement for companies listed on the London Stock Exchange with more than 250 staff to disclose the ratio of chief executives’ remuneration to the median pay of UK employees every year.
Pay for 2019 will be first under the microscope, which means the initial disclosures will be released in 2020.
Investors have been calling for more transparency around executive pay and how it aligns with salaries and bonuses across companies.
Persimmon, a housebuilder, ousted its chief executive, Jeff Fairburn, in November after a furore over his £75m bonus. That package was honoured despite a shareholder revolt in April in which nearly 64% voted against the company’s remuneration policy.
MPs also hit out at the company for failing to pay the living wage to its lowest-paid workers. Persimmon, however, said it has signed up to pay the £9 living wage starting in January 2019.
Royal Mail had one of the biggest shareholder revolts in UK corporate history in July. About 70% voted against its pay policy in light of an annual package for the chief executive, Rico Back, which was worth up to £2.7m. This was on top of a £6m “golden hello” for having left the company’s European subsidiary. Unilever, AA and Cineworld also experienced investor backlashes over director pay in 2018.
Luke Hildyard, the director of the High Pay Centre thinktank, said the rules were a step in the right direction. “Government policy is overwhelmingly focused on supporting business, on the basis that successful businesses benefit wider society,” he said.
“But too many companies lavish excessive pay awards on their top executives while holding down pay for low and middle-income earners, meaning that the full potential benefits of business success go unrealised.
“Putting information about pay ratios in the public domain won’t instantly eradicate injustice, but it will give investors, workers and other stakeholders a better insight into the fairness of company pay practices.”
The business secretary, Greg Clark, stressed that most companies in Britain act responsibly.
“We do, however, understand the frustration of workers and shareholders when executive pay is out of step with performance, and their concerns are not heard,” he said.
“The regulations coming into force today will build on our reputation by increasing transparency and boosting accountability at the highest level – giving workers a stronger dialogue and voice in the boardroom and ensuring businesses are accountable for their executive pay.”