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Legislation before parliament

New ‘pay ratio’ law aims to control fat cat rewards

Fat cats may no longer get the cream


 

Britain’s biggest listed businesses will be forced to disclose the gap between the pay packets of their chief executive and an average worker.

Companies with more than 250 employees will be required to publish this “pay ratio” every year as part of measures promised by Prime Minister Theresa May to control “fat cat” pay.

There has been a broad welcome for the plan since details first emerged at the turn of the year, although the Trades Union Congress said it does not go far enough.

It comes after a series of shareholder revolts in recent years over excessive pay and bonuses, even in cases of poor performance – so-called ‘rewards for failure’.

Investors and workers most commonly protest at the sheer size of pay packets handed to senior executives. Firms such as BP, Shell, Astrazeneca, William Hill and WPP have been targeted.

Shareholders are being urged to vote against a pay package for property company Interserve’s chief executive Debbie White at its annual general meeting (AGM) this week.

Ms White was paid £525,900 in the four months between her joining the company in September and the end of last year, comprising a salary of £216,667 and a bonus of £270,089 plus other contributions.

But shareholder advisory firm Glass Lewis said it had concerns about the pay deal, especially her bonus which is 125% of her salary, the most she could have earned under Interserve’s remuneration scheme.

Jeff FairburnHousebuilder Persimmon admitted earlier this year that its incentive scheme ought to have had a cap after it agreed to pay £600m in bonuses to its executives, including the biggest bonus in British corporate history – £75m – paid to chief executive Jeff Fairburn (right), trimmed after protests from the original £100m he was due to receive.

The new rules, as well as introducing the publication of pay ratios, will also require listed companies to show what effect an increase in share prices will have on executive pay, in order to inform shareholders when voting on long-term incentive plans.

Ahead of legislation being laid before the UK parliament on Monday Business Secretary Greg Clark said: “Most of the UK’s largest companies get their business practices right, but we understand the anger of workers and shareholders when bosses’ pay is out of step with company performance.”

Chris Cummings, chief executive of the Investment Association, said investors wanted greater director accountability and more transparency over executive remuneration.

“Investors will expect boards to articulate why the ratio is right for the company and how directors are fulfilling their duties,” he said.

The director of the High Pay Centre, Luke Hildyard, said pay ratios could prove useful to investors, workers and society more broadly.

“We hope that [the move] will initiate a more informed debate about what represents fair, proportionate pay for workers at all levels,” he said.




The CBI’s Matthew Fell said high pay was only ever justified by outstanding performance: “This legislation can help to develop a better dialogue between boards and employees about the goals and aspirations of their business, and how pay is determined to achieve this shared vision.”

UK Government Minister Lord Duncan said: “It only takes poor behaviour from a small number of companies to damage the public’s trust in big business. These new laws will ensure that differences in salary within large companies across Scotland and the whole of the UK – and the reasons for the variations – will be there for all to see. 

“Improving transparency and accountability in this way, plus other initiatives such as giving employees a voice in the boardroom, will help create a more equal and fair society while ensuring that the UK remains a world-leading place to invest and do business.”

TUC general secretary Frances O’Grady wants places for worker representatives on boardroom pay committees.

“Publishing and justifying pay ratios is a first step, but more is needed. Fat cat bosses are masters of self-justification and shrugging off public outcry. New rules are needed to make sure they change.

“We need guaranteed places for worker representatives on boardroom pay committees. That would bring a bit of common sense and fairness to decision-making when boardroom pay packets are approved.

“And the government should put an end to phoney incentive schemes that reward executives above and beyond the actual results they get.”

If approved, the regulations will come into effect from the start of next year, meaning companies will start reporting their pay ratios in 2020.

 



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