With increased support for private sector pay ratio reporting now coming from the likes of major investors such as Legal & General and the Investment Association, Stuart Hill of Pay Compare – www.paycompare.org.uk – argues in this guest blog that action by the UK government is now essential.
The role of pay inequality in driving wider income inequality is well recognised. For the vast majority of us our weekly or monthly pay packet is our main source of income, so if we are to reduce the overall excessive level of income inequality we see in the UK it follows that we must reduce the extreme level of pay inequality that we currently endure.
To this end, in June 2010 the new Prime Minister, David Cameron, and his Chancellor, George Osborne, commissioned economist Will Hutton to lead an Independent Government Inquiry to make recommendations on promoting pay fairness in the public sector by tackling disparities between the lowest and highest paid in these organisations. In his final report in March 2011, Hutton’s first recommendation to Government was that from 2011-12 all public service 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 January 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 s 38 now required each local authority of England and Wales to publish annually a pay policy statement which set 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 on their websites each year their pay ratios. Welsh Government guidance placed a similar expectation of public pay ratios disclosure on local authorities in Wales.
Moving beyond local government, since 2011-12 the Government Financial Reporting Manual (FReM) – the Government’s official accounting guidance to those handling public funds – 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 come 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” elsewhere 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.
Against a backdrop of continuing sky-high top pay, seeing the average pay of FTSE 100 chief executives reach well over £5 million in 2015 (almost 150 times the average pay of their employees) we heard new Prime Minister Theresa May state her commitment to ‘ordinary working class’ people. On coming to office, she proposed reform of UK corporate governance in the face of such persistent boardroom excess – to put employees on company boards, to introduce binding shareholder votes on corporate pay, and, to promote greater transparency, to see publication of the pay ratio between a CEO’s pay and the average pay across their company.
Moves towards comprehensive pay ratio reporting in the UK started six years ago. We have since been overtaken by other countries such as the USA and India in requiring private sector reporting of pay ratios. The Prime Minister’s welcome words now need to be followed by action to deliver pay ratio reporting that will allow full transparency and scrutiny of pay inequality in the UK. Only when the general public, consumers, investors and employees are properly informed about pay inequality will we be able to bear down on the unacceptable pay differences that currently exist and move the UK decisively towards a fairer, better future.
Stuart Hill, Founder and Executive Director, Pay Compare.
Pay Compare wants a fairer economy that achieves improved wellbeing for all. We help consumers and investors favour fairer employers by providing a free website of UK employer pay ratios. We campaign to make pay ratio reporting common practice in the UK.
This is a guest blog and the views expressed are those of the author and not necessarily those of The Equality Trust.