By Mark Fairlie

The Government has announced plans that will force major employers across the UK to not only publish but to justify the difference between their CEOs’ pay and that of the average worker.

If approved by parliament next week, the new legislation will come into effect from January 2019; meaning companies with 250 or more employees will start reporting their ‘pay ratio’ in 2020.

Business Secretary Greg Clark told the BBC that whilst most of the UK’s largest companies “get their business practices right… we understand the anger of workers and shareholders when bosses’ pay is out of step with company performance.”

He believes the new laws will increase accountability within firms in the UK and improve transparency between shareholders and staff; all helping to “build a fairer economy”.

What is the pay ratio?

The wage ratio refers to the difference between the top salaries within the company and the bottom wages; measuring the distribution of pay within an organisation. It is calculated by dividing the company’s CEO’s earnings by the pay of the median employee (i.e. the average wage earned by staff).

The new rules were first proposed back in 2016 when Prime Minister Theresa May called for “responsible capitalism” in the UK. The PM also criticised an unknown company director who “takes out massive dividends while knowing that the company pension is about to go bust”; urging businesses to tackle inequalities of pay within their organisations.

If the new law is approved, businesses across the country will be required to explain why their pay ratio is the way it is – justifying any vast inequalities in their pay distribution among workers and top bosses.

The pay ratio and the pay gap

UK firms forced to justify pay gap between bosses and workers

This new legislation follows on from the gender pay gap disclosure requirement brought in earlier this year. It meant that all UK companies with 250 or more employees were made to publish details of the salary difference between their male and female employees.

UK chemist and retailer Boots came under criticism after their gender pay gap report found that despite 78% of their workforce being women, there was still a pay gap of 21%. The company explained that the divide was due to women holding more of the lower paid roles within the firm and more men working at more senior levels.

Elizabeth Fagan, managing director of Boots for the UK and Republic of Ireland, told the Independent,

“We welcome the introduction of gender pay gap reporting as it’s an opportunity to identify the root causes of any gaps that exist within our business.”

It is thought that by also reporting pay gap differences between workers and CEOs as well as men and women, companies will do more to consider fairness and equality in their organisation.

Responses to the pay ratio proposal

However, with both the pay gap and the pay ratio, these businesses are not legally required to do anything more than report their figures; which has led many to criticize the pay ratio disclosure legislation.

Many campaigners and investors have expressed concerns as to whether the greater transparency brought by a boss to worker pay disclosures will actually urge businesses to change their ways.

Rebecca Long Bailey, shadow business and industrial secretary, has said that the pay ratio proposal shows “the Tories have missed the mark again; re-announcing half-baked, rehashed policies that do nothing to tackle the entrenched inequality that’s crippling our society.”

TUC general secretary Frances O’Grady has said that the pay ratio disclosure and justification requirement is a good first step, but that much more is needed.

“Fat-cat bosses are masters of self-justification and shrugging off the public outcry. New rules are needed to make sure they change,” he said.

He suggested that the government should push for guaranteed places for worker representatives on boardroom pay committees to ensure the workforce is given a say in decision-making regarding wages. O’Grady added:

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