Reducing CEO pay ‘would fund significant pay rises for low earners’

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Coral parent GVC Holdings had the highest CEO/median employee pay ratio Willy Barton / Shutterstock.com

Reducing top executives’ pay by 3% could fund a median annual pay rise of £2,000 for FTSE 350 companies’ lowest earners, new analysis has found.

According to the High Pay Centre, which analysed the annual reports of the first 107 firms to comply with executive pay ratio reporting requirements in the first four months of 2020, reducing top earners’ salaries only slightly would improve pay fairness post-pandemic.

Doing so would likely have a significant impact on “millions” of key workers’ salaries, the report says, as the healthcare sector has the highest CEO/median worker pay ratio at 129:1.

Introduced earlier this year, the executive pay ratio reporting legislation requires all UK-listed companies with more than 250 employees to disclose the ratio of their CEO’s pay to the lower, median and upper quartile pay of their employees.

The High Pay Centre’s analysis reveals that the FTSE 100 median CEO/median employee ratio is 74:1 and the ratio for CEO/lower quartile employee is 109:1. In the FTSE 350, the respective ratios are 55:1 and 78:1.

Ladbrokes and Coral parent GVC Holdings had the highest CEO/median employee ratio at 229:1, followed by construction materials manufacturer CRH (207:1), pharmaceuticals giant AstraZeneca (190:1) and Serco (190:1).

For the 11 FTSE 100 firms receiving wage subsidies via the government’s furlough scheme or the Bank of England’s Covid Corporate Financing Facility, the median CEO/median worker ratio is 80:1.

“Given the use of state support by these companies, their employment practices are a matter of public interest. All companies have a duty to consider how they can pay workers more fairly, and this is especially the case for those reliant on public funding,” the Re-thinking reward report notes.

It says the real pay ratios are likely to be higher than those reported because 25% of workers are earning less than the lower quartile threshold. It compared CEOs’ pay with the annual equivalent of the national minimum wage and found the median CEO/low paid worker ratio is in fact 253:1 for FTSE 100 firms and 133:1 for FTSE 350 organisations.

The report is also critical of the narrative employers are using to justify the size of their pay ratios, particularly the fact that many companies use similar wording.

“This may reflect the use of a standardised text to justify pay ratios by consultants advising on remuneration reports, without proper reflection on or explanation of the pay distribution at the companies in question,” it says.

Given the use of state support by these companies, their employment practices are a matter of public interest. All companies have a duty to consider how they can pay workers more fairly, and this is especially the case for those reliant on public funding” – Re-thinking Reward report

Despite the shortcomings in the reports, the think tank says a lot of information can be gained from them and they can help organisations and their stakeholders form an action plan.

“No two business models are exactly alike, meaning context is critical when comparing different pay ratios. The exclusion of indirectly employed workers from the calculation means that some disclosures may not reflect the company’s workforce as commonly understood. There is also a need for more granular information on top pay between the CEO and the upper quartile,” it says.

“Nonetheless, there is a lot of valuable information that can be gained from the disclosures, as well as insights for stakeholders to act upon. These initial findings add to our understanding of how pay is distributed within public companies.”

Specifically, it finds that executive pay ratio reporting can:

enable investors, employees and their representatives to have better dialogue with companies regarding employment models and their link to company strategy, using sectoral comparisons as part of discussions about how and why their model differs from rival companies
support arguments for fairer pay practices and to raise pay for the lowest earners – for example, by citing the scope for redistribution from higher earners
encourage debate about what top, middle and low earners make, and why – just as gender pay gap reporting has prompted a debate about issues such as working hours, workplace culture and division of labour in the home.