UK seeks to rein in boardroom pay with new ratio demands

LONDON (Reuters) - Listed British companies will have to justify the gap in salaries between their average worker and chief executive under proposed new rules that fall short of Prime Minister Theresa May’s initial plan to tackle soaring executive pay.

FILE PHOTO: Storm clouds are seen above the Canary Wharf financial district in London, Britain, August 3, 2010. REUTERS/Greg Bos/File Photo

May came into power after the 2016 Brexit vote vowing to tackle what she called the “unacceptable face” of capitalism, including pay gaps and mismanaged takeovers, that had driven a wedge between British bosses and their workers.

But her initial proposals to put workers on boards and give shareholders binding votes on executive pay have been watered down as her position has weakened. Campaigners and investors were divided over whether the greater transparency would be enough to force companies to curb pay excesses.

“I am afraid that the government has bottled it in the face of business lobbying,” Frances O’Grady, the head of the Trades Union Congress, told BBC Radio.

According to campaign group the Equality Trust, the chief executives of companies in the FTSE 100 share index take home on average 5.3 million pounds ($6.9 million), or 386 times more than a worker on the minimum wage.

May initially attacked the divide, but toned down her criticism after losing her majority in an election that undermined her position in a party that has for decades encouraged a low-key approach to corporate regulation.

The prime minister has also worked to ease strained relations with business leaders to secure their support for her plan to leave the European Union.

“As we leave the EU and chart a new course for our country, the economy we build must be one which truly works for everyone, not just a privileged few,” May said in the government paper.


Under the new proposals which will apply to all listed companies and come into effect by June 2018, remuneration committees will be tasked with taking into consideration the pay of all their workers when they set executive targets.

Companies will have to publish the ratio between the CEO and their average worker, and those companies suffering a more than 20 percent shareholder pay rebellion will be named in a public register designed to shame firms into changing their ways.

In order to bring the voice of the average employee to the boardroom, companies will be given a choice between assigning a non-executive director to represent staff, create an employee advisory council or nominate a director from the workforce.

Large private companies will also have to adopt stronger corporate governance arrangements and the Financial Reporting Council (FRC), which oversees corporate governance, will work with business trade groups to develop a set of principles.

Business lobby groups and some institutional investors welcomed the new proposals as a pragmatic way to address the problem of soaring pay, and the independent High Pay Centre said the move to publish pay ratios was a huge step forward.

Many companies already publish their total pay bill and staff numbers but the High Pay Centre said the publication of a ratio would provide the best data to assess company policy.

“This has been a crucial missing piece of evidence in the debate over top pay,” director Stefan Stern said.

Companies that have endured big shareholder rebellions in recent years include the advertising giant WPP WPP.L and oil group BP BP.L. Both companies have since reduced the size of the packages for their chief executives.

The FRC said transparency can change behaviour. But not everyone was impressed. Daniel Godfrey, former head of the Investment Association and now head of the People’s Trust, said governments needed to be more aggressive.

“If you think about the history of the last 20 years, it’s been gradually increasing transparency and disclosure. But let’s look at what the output of that has been; what’s the outcome and direction of travel on pay? It’s become hugely more complicated and gone through the roof,” he said.

“I’d describe this as an epic fail.”

Writing by Kate Holton; additional reporting by Elisabeth O’Leary; Editing by Raissa Kasolowsky and Hugh Lawson