16 April 2021
Dear David,
Compliance with reporting of pay ratio requirements – High Pay Centre analysis
The High Pay Centre recently published research analysing the first year of mandatory ‘pay ratio’ disclosures mandated by the Companies (Miscellaneous Reporting) Regulations 2018. We are writing to highlight elements of non-compliance with the requirements.
The regulations state that companies must disclose the total remuneration of employees at the lower quartile, median and upper quartile mark, not just the ratio of the pay of these employees compared to the CEO. Not all companies have complied with this requirement: from our analysis of the FTSE 350 Biffa, Centrica, Electrocomponents, Homeserve, Ibstock, Imperial Brands, Pets at Home, Rentokil, TalkTalk, Telecom Plus and Wetherspoons all failed to disclose the pay levels of employees at the three required points of the pay distribution, publishing only the ratio to CEO pay. Of this list, Centrica, Ibstock and Rentokil have now published 2020 annual reports. All three have repeated the failure to disclose absolute pay thresholds.
Obviously, despite companies’ failure to disclose these thresholds it is easily possible to calculate them by dividing the declared figure for CEO pay by the declared ratio. However, the principle of compliance with regulations is important. Six of the companies we identified pay their lower quartile employees below £20,000 (on an FTE basis), suggesting that they may be trying to make their large number of comparatively low-paid employees less obvious.
We would also like to note that we found that very few of the narrative discussions of pay ratios in annual reports provided meaningful supporting information. The regulations state that companies must provide a narrative to accompany the disclosures, including an explanation of ‘whether, and if so why, the company believes the median pay ratio for the relevant financial year is consistent with the pay, reward and progression policies for the company’s UK employees taken as a whole’.
For example, it was hard to find instances of companies discussing conceptions of fairness in relation to their ratio, how employees are engaged as part of the pay-setting process, or any objectives the company has in terms of raising pay for low earners and/or reducing inequality – all of which might be relevant to companies’ pay policies, particularly in light of the increased regulatory emphasis on their responsibilities to stakeholders.
This might be a subject on which the FRC wishes to consider issuing further guidance. I have enclosed a copy of the report and would be happy to discuss in more detail, if that is of interest.
Yours sincerely,
Luke Hildyard
Director, High Pay Centre