The Government has today published a consultation on corporate governance reforms, including a controversial proposal on executive-employee pay ratio reporting. While corporate governance is not typically an attention-grabbing topic for HR, these proposals have broader significance and merit attention.
Pay ratios and other proposals
Reflecting increasing public intolerance of corporate malpractices and an apparent lack of accountability when it comes to some executive pay, the Government’s consultation is looking to rebuild trust and reform boardroom pay practices. The consultation contains an extensive range of corporate governance options and includes the following:
- requiring companies to publish the ratio between top and middle pay
- introducing measures to ensure the ‘voice’ of employees is better represented on company boards, for example, requiring the remuneration committee to consult the workforce on its pay policy, designating a non-executive director to represent workforce interests, creating stakeholder advisory panels and introducing stronger reporting requirements on how the board gives consideration to employee interests
- increasing governance accountability for unlisted companies, possibly by extending the existing UK Corporate Governance Code to larger privately-held companies or developing a bespoke Code. Currently, only listed companies are subject to the UK Corporate Governance Code which consists of good practice principles covering topics such as remuneration, reporting and accountability and includes reporting on workforce diversity and executive pay
- strengthening shareholder engagement with, and power over, executive pay, which could include binding annual shareholder votes for all, or only some, companies.
Reporting on the executive-employee pay ratio is designed to throw a spotlight on the growing gap between worker and boardroom pay. By increasing transparency in this way, companies would be expected to come under pressure to justify pay levels given the performance of the business and the rewards for the general workforce.
Binding shareholder votes on pay are, in part, aimed at blocking excessive pay awards, particularly where they appear unrelated to the performance of the company. Similarly, by extending corporate governance standards to some privately-held companies, the expectation is that a combination of greater scrutiny and a requirement to ‘comply or explain’ would deliver improvements in board leadership, corporate responsibility and remuneration practices.
However, it should be noted that all the options are just that – options in a consultation – and may not be adopted, or may be watered down before implementation.
Repercussions for HR
Just as 84% of women told a Government survey that they would consider an employer’s gender pay gap when applying for a job, it is anticipated that a large and poorly communicated executive-employee pay ratio could have negative repercussions on employee engagement, retention and recruitment as well as on corporate reputation. Similarly, a tug of war played out in the media between investors and the boardroom over setting executive pay would do little to inspire employee morale and confidence.
As such, we expect that HR will want to be involved in both internal and external communications on the ratio (if the Government goes ahead with this option). This could include, for example, assessing the ratio’s risk to the employer’s internal and external reputation, explaining the ratio to employees and their representatives before it is published, deciding how to communicate any anomalies or misleading data, such as where competitors have outsourced their lowest paid jobs, and benchmarking the ratio with comparative employers with a view to understanding key differences and trends over time. In addition, HR has an important role to play in relation to the proposals to take employee soundings on executive pay and to involve them in broader stakeholder panels.