Executive remuneration and workforce pay

Fri 01, November

The need for remuneration committees to have a broad remit to consider workforce engagement and pay is highlighted in the UK Corporate Governance Code, which requires committees to review workforce remuneration and related policies, and take these into account when setting the policy for executive remuneration.

What is expected of the remuneration committee regarding workforce pay?

Remuneration committees in FTSE-listed companies are required to: review workforce remuneration and take this into account when setting the policy for executive directors; disclose in the remuneration report what engagement with the workforce has taken place on executive pay; and explain the reasons why executive pay is appropriate using internal measures, including pay ratios and pay gaps.

What should committees look at when reviewing workforce pay?

The FRC recommends that the committee’s review of workforce pay covers the company’s overall pay philosophy, as well as details on the individual components of employee pay, including base pay, benefits and all aspects of variable pay – regardless of where this is managed in the business. Many companies now also receive data on workforce demographics and engagement to help inform the committee’s decision making process around senior executive pay.

Companies are encouraged to disclose in the directors’ remuneration report how the committee has taken workforce pay into account when making decisions on executive pay.

The level of detail provided in remuneration reports on company-wide pay matters has increased in recent years, with some companies now providing detailed disclosure on workforce pay policies and alignment of pay principles and policies across the business.

How are companies engaging with employees on executive pay?

Some companies report using employee forums and town hall meetings as an opportunity to guide employees through the executive remuneration policy. This often includes explaining how the remuneration policy is aligned with the company strategy and shareholder expectations, and how remuneration is linked to the wider pay policies in practice. It can also be an opportunity to clarify how the executive pay structure is subject to longer deferral periods and shareholding requirements. However, care needs to be taken to ensure that such processes are not seen to be one-sided and that an open dialogue can take place, with the outcome of this reported back to the committee.

Does the CEO pay ratio apply to us?

Quoted companies with more than 250 UK employees are legally required to calculate and disclose their CEO pay ratios – specifying the CEO’s most recent total remuneration figure as a ratio against the total remuneration of employees ranked at the 25th, 50th and 75th percentiles on the basis of full-time equivalent pay. The disclosure is designed to allow interested parties inside and outside the organisation to understand how remuneration policies across the organisation compare to the executive pay policy. Committees should focus on evolving a clear narrative around how the executive pay outcome has aligned with business performance, as well as how success has been shared more widely across the organisation.

What are the requirements for gender pay reporting? Do they apply to us?

Since 2017, any organisation (whether listed or unlisted) that has more than 250 employees has been required to publish figures about their gender pay gap. As part of its annual work programme, remuneration committees should work closely with management and the Board to understand the key figures, the drivers for any gap and the initiatives in place to help close the gap and improve diversity across the organisation.

Is there an update on requirements around ethnicity pay reporting?

In 2018/19, the UK Government consulted on options for employer-led ethnicity pay reporting. Following the consultation, the Government met with businesses and representative organisations to understand the barriers to reporting this data, and explore further what information could reasonably be published. In July 2023, owing to difficulties in designing a reliable common measurement and disclosure methodology, the Government elected not to mandate ethnicity pay reporting in the UK. However, the consultation resulted in many companies voluntarily collecting data on ethnicity, with some FTSE-listed companies voluntarily publishing ethnicity pay ratios (e.g. Barclays, ITV and NatWest Group).

How will EU Pay Transparency requirements impact executive and workforce pay alignment?

The EU Pay Transparency Directive, legislation, designed to deal with pay discrimination and misalignment of pay practice across member states, is set to take effect in 2026. UK businesses who have a presence in Europe will be required to disclose pay ranges in job advertisements, and will need to prepare for a much more granular level of disclosure of workforce pay. Although the directive will not affect all UK companies directly, we expect that progression towards increased pay transparency in Europe will have an influence on the UK market as it responds to global best practice. Companies should consider their current approach to pay disclosure in anticipation of a marked increase in workforce engagement on pay.