Where next for high pay?

by Mubin Haq, CEO of the Standard Life Foundation

Many have said the coronavirus pandemic is an opportunity to rethink our economies and to build back better. Executive pay has been increasing over the last few decades but until very recently we have had little data as to how this compared to pay levels in other parts of a company. Our sole source of information related to CEO pay packages. .

In 2020 all quoted public companies with more than 250 UK employees will have to provide pay ratios between their highest earner and pay at the 25th, 50th and 75th percentile of their UK workforce. This measure was brought in by the Conservative government with the aim of providing greater transparency on pay.

Today the High Pay Centre (HPC) publishes a report funded by the Standard Life Foundation which analyses these new pay ratio disclosures. The pandemic has rightly seen a relaxation of some company reporting obligations giving companies more time to meet reporting requirements, so the dataset is slightly smaller than we anticipated.  However, HPC have managed to analyse 107 companies in the interim report published today.

The pay ratios data highlights the very wide variance amongst companies as to how they reward their employees. This ranges from the CEO of a FTSE 350 company earning 543 times what an employee at the lower quartile of their company earns, to just eight times. There’s a huge variance and a range of factors at play.

One of the most interesting findings is that fairly modest reductions in pay of employees at the upper quartile could translate into very tangible gains for lower-paid workers. For example, a reduction of 3% in the upper quartile could fund a median pay rise of £2,000 for the lowest earning quartile of employees in the same companies.

We hope that today’s report will lead to employers becoming more focussed on pay gaps and to better explain why a company’s ratios are higher than the industry average. There may be good reasons. For example, Shell’s ratios are much lower than BP’s despite being a very similar organisation with a similar CEO pay award. This is because Shell franchises its petrol stations, meaning low-paid petrol station staff who are not directly employed by the company are not included in its pay ratio calculations. BP employs its forecourt staff.

Just as reporting on gender pay has led to some positive changes amongst companies, we hope this new pay data disclosure will also result in engagement and progress. In particular, we hope the research will be of value to a number of stakeholders in the debate on pay and business governance, including:

  • Businesses, particularly the remuneration committees that oversee pay-setting processes and the directors or committee designated responsibility for stakeholder. How a company's pay levels compare to other similar businesses can support insights and decisions regarding its wider strategy or business model.
  • Investors seeking to understand the employment practices and corporate cultures of the companies they invest in, and how their spending on pay – a significant cost for any business – is distributed.
  • The workers themselves and the bodies that represent them, who can potentially benefit from better information about how their pay levels compare to others within their own company or in other similar organisations.
  • Policymakers interested in the initial impact of the pay ratio disclosures, and their insights and limitations. In the aftermath of the pandemic and with many businesses reliant on government support, details of the distribution of their pay costs may also be relevant to support packages.
  • Researchers interested in prevailing corporate pay practices, who can use the data to examine how pay distribution relates to issues such as industry type, business performance or societal impact.

The coronavirus pandemic has already caused a shift in the way big companies do business. We have seen the CEOs in the likes of Primark and BA take big pay cuts to reduce the company’s wage bill and ensure the long term future of their companies. Tesco saw a recent shareholder revolt over executive pay. The pandemic has also highlighted that there are many workers who have been undervalued to date but who are essential and key to keeping our country running. This anecdotal evidence and changes to public attitudes, alongside government-introduced measures such as pay ratio reporting, shows the wind is changing when it comes to setting pay rates. Perhaps we really will see a levelling up for some of the lowest paid workers.

Note: A final report will be made available towards the end of 2020 with full results and analysis of the FTSE 350 companies.