January 8, 2020
Three-fifths of UK organisations are still not ready to report their executive pay gap almost twelve months after the legislation came into force, claims a new poll by HR services provider MHR. This year UK listed companies with more than 250 employees are, for the first time, obliged to publish the pay ratio between their CEO and “average” employees in early 2020 and explain the reason for their executive pay ratios.
The poll of 1000 people responsible for reporting the executive pay gap at their respective company found that 60 percent remain unprepared for the new rules.
Jeanette Wheeler HR Director at MHR says: “Although companies affected by the new legislation will already have put robust processes in place to report their gender pay gap, which become mandatory in 2018, calculating the executive pay ratio is more complex and preparing the report can take much longer than expected.
“Gathering the data, making accurate calculations and explaining the results is time-consuming and admin heavy. It’s best to start planning as early as possible so that people and resources aren’t overwhelmed at crucial times for your business.”
To help organisations meet their obligations to report their executive pay gap, Jeanette Wheeler explains how to plan, calculate and report in line with the regulations.
What is executive pay ratio reporting?
Listed companies with more than 250 UK based employees must publish the pay gap between their CEOs and the rest of their workforce. This is a legal requirement that was introduced in January 2019.
What do you need to report and where?
Executive pay gap data must feature in the annual director’s remuneration report that is presented for shareholder approval at the Annual General Meeting – there is no single deadline that all organisations must meet. The reports that are published in 2020 will reflect on the financial year starting on or after 1st January 2019.
The data needs to be presented in a table that shows total CEO remuneration as a ratio to the median, 25th and 75th percentile of employee pay. This table must be added to year-on-year to include up to 10 years’ worth of data in each annual report.
Organisations then need to include supporting explanations to put the findings in to context. This includes the methodology used to calculate the ratio, reasons why the ratio might have changed from the previous year and whether your organisation thinks the median is reasonable.
For the sake of transparency, it’s a legal requirement for large listed companies that your annual director’s remuneration report is available free of charge on your company’s website for ten years.
Who needs to be involved with executive pay ratio reporting?
The scope of this project means that several areas of your organisation may need to contribute information and resources. If companies don’t have a fully integrated HR and payroll system HR teams who hold information on remuneration packages for employees may need to liaise with payroll and finance teams to source all the relevant information.
Internal communications and PR teams also have an important role to play when it comes to building a narrative around your results. Agree a response that can be shared with employees, the media and any other stakeholders should questions arise.
How to prepare for executive pay ratio reporting
- Identify key stakeholders across your business – who will be responsible for providing and processing the data, preparing the report, publishing it and responding to it.
- Calculate CEO pay – this is their total remuneration package, including salary, taxable benefits, performance-related pay and pension benefits, plus any other assets.
- Calculate employee pay – identify which workers are ‘employees’ as per the government’s calculation guidelines, then include their full-time equivalent pay and benefits.
- Choose a methodology to work out the ratio – the government has outlined three methodologies that it will accept for working out executive pay ratio, with Option A being their preferred and most accurate. Option B involves using gender pay data to work out the percentiles as “best equivalents”, while Option C involves using any pre-existing pay data that your organisation holds.
- Establish communications plans – be prepared to explain the report’s findings to interested parties.
The challenges of executive pay ratio reporting
Your ability to process the data swiftly and accurately comes down to the quality of your HR and payroll systems. The project team needs good access to all forms of remuneration data, both current and historic. This is very difficult to do manually if your data is spread across multiple systems.
Preparing your organisation’s pay gap report involves a large amount of preparation, particularly for HR and payroll teams. It’s estimated that preparing the data alone manually could take at least two weeks, which may impact on the team’s ability to deliver business as usual pay cycles.
Identifying employee roles and remuneration packages can also take time in a large and complex workforce. CEO pay itself isn’t always easy to calculate, especially if there are rewards that are linked to shares, bonus or commission that can vary in value.
Your next steps
New regulations on what companies must report on always puts new pressures on workload and resources. To help HR and payroll teams plan for this effectively, it may help to do a trial run of your executive pay ratio report to identify the challenges early.
You might decide that the most efficient and accurate way to produce the report is by using a specialist service. Consultancy services that focus on business analytics have the tools to automate the data calculations on your behalf. They also have the experience to ensure a high level of accuracy in the results.
Whichever way you choose to run the project, getting it right this year will make it much easier to run and compare your results in every year that follows.