Publicly-listed companies will be forced to publish the pay ratios between chief executives and their average UK salary under proposed new laws.
The government has outline a set of proposals that it says fulfil manifesto pledges to increase accountability and transparency at the top tables of British businesses. As well as measures to control executive pay, these include plans to increase the voice of employees and other stakeholders in board decisions.
Around 900 listed companies will be affected by the new laws, which the government wants to bring into effect by June next year.
Greg Clark, business secretary, said: “Our legal system, our framework of company law and our standards of corporate governance have long been admired around the world.
“Today’s reforms will build on our strong reputation and ensure our largest companies are more transparent and accountable to their employees and shareholders.”
Under the proposals companies will be required to annually report the ratio of CEO pay to the average pay of their UK workforce, alongside an explanation of any year-on-year changes to this ratio.
A public list will also be compiled naming and shaming companies where more than a fifth of shareholders oppose the executive pay package, which will be run by the investment managers’ trade body the Investment Association.
To increase stakeholders’ input into top table decisions, premium listed companies will be told to either appoint a director from the workforce, designate a non-executive director to represent employees or form a formal employee advisory council – on a “comply or explain” basis.
The reforms have been welcomed by a number of business groups including the Institute of Directors (IoD), the Confederation of British Industry and the manufacturers’ organisation EEF. Stephen Martin, director general of IoD, said: “We welcome the pragmatic approach the government is taking to improve how company boards work.
“The secretary of state [for business] is taking a sensible approach on giving workers a bigger say, by allowing companies to choose the best way to implement the new rules.”
The Conservative Party pledged to take action on corporate pay and governance in their election manifesto, which included a committment to obliging companies to publish pay ratios. However, employee groups including the TUC have said the proposals fall short on the government’s pledges, which included shareholder votes on executive pay packages, among other things.
Frances O’Grady, general secretary of the TUC said: “This is a far cry from Theresa May’s promise to crackdown on corporate excess. It’s a feeble proposal, spelling business as usual for board rooms across Britain. [Her] pledge to put workers on company boards has been watered down beyond all recognition.”
Keith Grint, professor of public leadership and management at Warwick Business School, said forcing firms to publish pay ratios was unlikely to change anything. “The ratio has been growing for decades, shows no sign of decreasing [and] has never been related to any kind of company performance,” he said.
“In the UK and the US we seem to have a romantic attachment to ‘heroic’ individual leaders that bears little relationship to the actual impact – good or bad – that individual leaders have,” he added.
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