speri.comment: the political economy blog

Pay ratio reporting: why the time for action is now

Large pay inequalities fuel inequality in the UK. The Government should act to introduce new legislation and measures without delay

Stuart Hill, Founder and Executive Director, Pay Compare

Stuart HillPay ratio reporting is currently a very hot topic.  Both the Prime Minister and Jeremy Corbyn have talked recently about the need to have private sector pay ratio reporting, and a Conservative MP also introduced a paper on corporate governance reforms which included the proposal to report CEO-to-median ratios. Meanwhile, the Green Party has had a 10:1 pay ratio policy for some time. For supporters of pay ratios it is encouraging to hear these proposals and see the issue feature so prominently.  However, whilst the proposals are welcome we now desperately need to see action to tackle the UK’s extreme private sector pay inequality which, of course, fuels the UK’s overall very high and damaging level of inequality.

The coming to prominence of pay ratio reporting has been something of a slow burn.  Interestingly, it started under centre-right governments who have been, initially at least, concerned with public sector pay inequality.  But, having let the ratio genie out of the bottle, there appears to be a growing recognition and concern about the impact on social cohesion and the damage that great pay disparity can have on public attitudes, especially towards business.  Indeed, significant voices in the business community (to which centre-right governments are traditionally attuned) have become increasingly concerned about the reputation of business around executive pay, notably institutional investors, with the latest to speak out being the world’s largest fund manager, BlackRock.

The major milestones in the journey to where we are now have been as follows:

  • In June 2010 the new Prime Minister, David Cameron, and his Chancellor, George Osborne, commissioned economist Will Hutton to lead an independent inquiry to make recommendations on promoting pay fairness in the public sector by tackling disparities between the lowest and highest paid in public organisations.
  • In his final report in March 2011, Hutton’s first recommendation was that from 2011-12 all public sector organisations publish their top to median pay ratios each year to allow the public to hold them to account. Furthermore, to make tracking pay ratios normal practice across the whole economy, and as part of its commitment to improve corporate reporting, he recommended that the government should require listed companies to publish top-to-median pay ratios in their annual reports from 2012. Hutton knew well that pay inequality in the private sector is much higher than elsewhere in the economy, especially in medium and larger companies.
  • By the end of 2011 Hutton’s recommendations were, in part, becoming reality. The Localism Act 2011 now required each local authority in England and Wales to publish annually a pay policy statement setting out its policies relating to (a) the remuneration of its chief officers, (b) the remuneration of its lowest paid employees and (c) the relationship between the remuneration of its chief officers and the remuneration of its employees who are not chief officers. Stating, ‘Transparency is the foundation of local accountability and the key that gives people the tools and information they need to play a bigger role in society’, the Local Government Transparency Code, in operation today, went further to require local authorities in England to publish pay ratios on their websites each year. Welsh Government guidance placed a similar expectation of public pay ratio disclosure on Welsh local authorities.
  • Moving beyond local government, since 2011-12 the Government Financial Reporting Manual (FReM) – the official accounting guidance to those handling public funds, including NHS organisations and Foundation Trusts – has required that reporting organisations publish in their annual accounts their top to median pay ratio.
  • Then, with the introduction of the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, the Government came as close as it has yet to requiring private sector businesses to publish their pay ratios. This regulation, in force today, requires that the annual directors’ remuneration policy of large and medium-sized UK companies must contain a ‘statement of consideration of employment conditions’ in the company, and the wider group where relevant. Specifically, this must set out ‘whether any remuneration comparison measurements were used and if so, what they were and how that information was taken into account’. Pay ratios provide such comparative measurement.

Today, we see mixed success in the fair pay initiatives which followed. Despite general compliance with the Localism Act and some good practice, research by The Equality Trust found pay policy statements of local authorities often hard to locate on their websites and difficult to access which inhibits cross-authority comparisons. The authorities also reported inconsistently.  The Act’s supplementary guidance requiring authorities to publish their pay multiples annually, and the inclusion of this practice as a financial instruction to other public sector organisations, appears largely successful – although quick and easy comparisons are not possible without the data being brought together in one place (a recommendation of Hutton).  However, regarding the private sector, where pay gaps are most extreme, the High Pay Centre reports, ‘The requirement contained in the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 forcing companies to compare pay increase for workers and CEOs has been next to useless’.

Pay Compare exists to encourage pay ratio reporting in the UK. We provide a single place where everyone can see and compare the pay ratios of employers to help us make informed choices and hold the organisations we use to account.  Our longer term goal is for the public and key stakeholders to favour fairer employers over the less fair.  We have had some successes but what is really needed is government action to normalise pay ratio reporting across the UK and, in particular, within the private sector. Steps towards comprehensive pay ratio reporting in the UK started seven years ago and since then the UK has been overtaken by other countries, such as the USA and India (as well as by some innovative local initiatives such as in Portland, Oregon) in requiring private sector reporting of pay ratios. This is why, in addition to our practical day-to-day work collecting UK employer pay ratios, Pay Compare supports The Equality Trust’s call for the government to introduce legislation without delay.  We wish to see, at minimum, all medium and larger companies report their top-to-median ratios and also, ideally, disclosure of top-to-lowest paid ratios as a desirable ‘Gold Standard’ level of reporting.  We also wish to see employers required to provide (in their annual accounts) a business rationale regarding the current ratios and an indicative ‘forward guidance’ statement showing how they intend to manage their ratios in the future.

The sands are beginning to shift.  This month the Quakers became the first major UK faith group to report their ratios at Pay Compare and the large institutional investor Legal & General, who have previously spoken out on executive pay excess, have stated they intend to disclose their top-to-median ratio in March.

The government can be dragged along by such events or it can seize the initiative and seek to shape and consolidate them.  Only when the public, consumers, investors and employees are properly informed about pay inequality will we be able to bear down on the appalling pay differences that currently exist – differences that the British public find unacceptable in survey after survey. The introduction of comprehensive, mandatory, pay ratio reporting would be a huge milestone to realising Prime Minister May’s aspirations for a shared society that works for all.  Pay ratios are, after all, much more than a metric.  They give substance to the idea that we are all connected and share a human bond.  They show that we care about what happens to each other and that there is such a thing as society. In torrid times, when division and anger seem widespread, this point needs affirming more than ever.

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