Executive pay gap reporting 2020: what’s required?

From the submission deadline to calculation methodologies, here’s everything you need to know about executive (CEO) pay gap reporting

With the first companies required to report on their executive pay gaps from early 2020, we answer some of the most common questions about why executive pay reporting has been introduced, what information your report needs to include, and how to calculate pay ratios.

What is executive pay gap reporting?

In January 2019, the UK government announced new regulations that would require certain UK companies to disclose their executive pay patios. The pay ratio indicates the relationship between the company’s CEO’s pay, and the pay of other employees in the same company.

This requirement is part of the Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860), which includes other measures aimed at improving corporate transparent such as reporting on the impact of share price growth on executive pay.

Which companies have to report on their executive pay gaps?

The reporting requirement applies to large UK-incorporated companies with more than 250 employees that are quoted on the UK Official List, the New York Stock Exchange, NASDAQ or on a recognised stock exchange in the European Economic Area (EEA). The reporting requirement does not apply to companies quoted on the Alternative Investment Market (AIM).

When does this information have to be reported?

Reporting will begin with pay awarded in the financial year beginning on or after 1 January 2019, so the first reports should be published in 2020. There is no fixed deadline for all companies’ reports to be published.

What information has to be reported, and where must these reports be published?

Companies who meet the criteria above must report on executive pay ratios in their annual directors’ remuneration report. The data must be presented in a table that includes the ratio of their CEO’s latest single total figure of remuneration (STFR) to:

• The median full-time equivalent (FTE) remuneration of a company’s UK employees
• The 25th percentile FTE remuneration of a company’s UK employees
• The 75th percentile remuneration of a company’s UK employees

Example table:

Y25, Y50 and Y50 are the respective pay and benefits for UK employees identified at the 25th, 50th and 75th percentiles of the company’s remuneration for the same financial year

Unlike the gender pay gap reporting regulations, the executive pay gap requirements stipulate that companies must provide a narrative that explains the reasons for their executive pay ratios. Alongside supporting information, this explanation must include:

• The methodology used to calculate the pay ratio (see below for more information)
• The reason/s for any changes to the ratios compared to the previous year
• Whether (and why) the median ratio is consistent with the company’s wider policies on employee reward, pay and progression

After the first reporting year (for financial years starting on or after 1 January 2019), each subsequent year’s pay ratio must be added to the table, continuing until 10 years’ worth of data is included in the annual directors’ remuneration report. So, for example, the 2019 financial year data will drop off the report after the 2029 report (although companies can voluntarily retain this information if they wish).

How do I calculate CEO pay?

You must calculate the CEO’s total remuneration for the relevant financial year by adding up all relevant elements:

• All salary and fees
• All taxable benefits (gross value)
• Any relevant performance-related pay or other assets
• Pension-related benefits
• Any other remuneration items

If your company had more than one CEO during a financial year, you must calculate the total remuneration relating only to the periods when the individuals were CEO. Do not count remuneration for periods when those individuals were not CEOs.

How do I calculate employee pay?

First, determine which of your staff are ‘employees’ for the purposes of this calculation (the government FAQ has more details).

Then calculate the FTE pay and benefits, which comprise:

• Wages and salary
• All taxable benefits (gross value)
• Any relevant performance-related pay or other assets
• Pension-related benefits

What methodology must I use to calculate the executive pay ratio?

The government will accept calculations made using one of three methodologies. Option A is the most accurate, and should be used “wherever possible and reasonable”. Options B and C use estimations to calculate the ratio.

Option A

• Determine the total FTE remuneration for all the company’s UK employees for the relevant financial year
• Rank those employees from low to high, based on their total FTE remuneration
• Identify the employees whose remuneration places them at the 25th, 50th (median) and 75th percentile points

Option B

• Identify the employees at the 25th, 50th and 75th percentile using your gender pay gap report

Option C

• Identify the employees at the 25th, 50th and 75th percentile using other existing pay data (in addition to, or as an alternative to, gender pay gap data), provided this data was gathered no later than the financial year prior to the financial year that you are reporting on

The government FAQ offers step-by-step guidance for calculating pay using these methodologies.

How big of a problem is executive pay?

High executive pay has been an ongoing concern among those seeking to improve equality and diversity in the workplace and reduce in-work poverty. Data from the CIPD and High Pay Centre suggests that the average FTSE 100 CEO is paid £1,020 per hour, and £3.92 million a year: 133 times more than the average UK worker. Last year, when average UK pay rose by just 3.1%, FTSE 100 CEO pay rose by 11%.

What should I do if I have more questions about the reporting requirements?

The government has produced a detailed FAQ that is available here. It’s likely that you’ll need data from your payroll system or HR software to compile the report, so your payroll and HR providers may be able to help with your calculations. It might also be useful to do a test run of the calculations using data from the 2018 financial year, to help you understand how long it will take to compile the information, and which of the three methodologies is most appropriate for your company.