Companies to be forced to reveal pay ratios

Government announces package of corporate governance reforms including board representation for employees

Publicly traded companies will be forced to reveal the pay ratios between their bosses and workers as part of a corporate governance reform package announced by the government.

The transparency rules will apply to the more than 900 UK listed firms, including Centrica, National Grid and SSE.

The government will introduce new legislation in the coming months requiring the companies to publish and justify the pay ratios between their chief executives and their average UK worker on an annual basis. They will also be obliged to publicly explain how their directors are taking employees’ and shareholders’ interests into account.

Any firm which has more than a fifth of its investors vote against an annual executive pay package will be compelled to sign up to a public register. The scheme will be set up over the autumn and overseen by the Investment Association – a trade body representing UK investment managers.

To ensure employees have a voice on the companies’ boards, the Financial Reporting Council (FRC) will alter the UK corporate governance code to compel firms to assign a non-executive director to represent employees, create an employee advisory council or nominate a director from their workforce.

The government has also confirmed its intention to examine the use of share buyback schemes to ensure they are not being used to artificially influence executive pay performance targets.

“One of Britain’s biggest assets in competing in the global economy is our deserved reputation for being a dependable and confident place in which to do business,” said business, energy and industrial strategy secretary Greg Clark. “Our legal system, our framework of company law and our standards of corporate governance have long been admired around the world.

“We have maintained such a reputation by keeping our corporate governance framework under review. Today’s [29 August] reforms will build on our strong reputation and ensure our largest companies are more transparent and accountable to their employees and shareholders.”

Institute of Directors director general Stephen Martin said: “The secretary of state is taking a sensible approach on giving workers a bigger say, by allowing companies to choose the best way to implement the new rules.

He continued: “Pay ratios will sharpen the awareness of boards on the issue of remuneration, but they can be a crude measure. Companies will have to prepare themselves to explain how pay as a whole in their business operates, and why executives are worth their packages.”

The government intends to bring the legislative reforms into effect by June 2018. Meanwhile, the FRC plans to consult on amendments to the UK corporate governance code in late autumn to enable the publication of a revised code by mid-2018. This would mean the code would apply to the majority of companies in 2019.

In April 2015, around 33 per cent of voting shareholders opted to reject a starting pay package worth up to £3.7 million – including a £2.7 million joining bonus – for new Centrica chief executive Iain Conn. The following April roughly 15 per cent voted to reject the £3 million pay deal for his first year in charge.

National Grid recently began an £835 million share buyback programme as part of its commitment to returning to shareholders £4 billion of the proceeds from the sale of a majority stake in gas distribution network Cadent.