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Corporate governance reforms will force listed companies to disclose pay ratios

Due to come into effect by June 2018, the new law will affect around 900 publicly-listed companies

Salaries remain one of the chief bastions of confidentiality within the corporate world. Although pay secrecy clauses are forbidden under the Equality Act in so far as an individual ‘seeks to make a relevant pay disclosure’, this covers only situations whereby an individual seeks to establish the existence of unlawful discrimination. Other pay confidentiality clauses have been left unaffected and, although sometimes a point of contention, remain permissible; however, the landscape is changing with new corporate governance reforms that are potentially more significant than the existing provisions under the Equality Act and will force listed companies to publish pay ratios.

Due to come into effect by June 2018, the new law will affect around 900 publicly-listed companies. These organisations will have a new duty to reveal the difference between the pay of their top executives and that of the average pay of their UK workforce. Perhaps even more pertinently, they must justify the disparity and publish a narrative that details annual shifts and variations to the pay ratio.

This is an attempt to force greater transparency and to ensure that the ratio is seen in the context of the pay and conditions that exist in a workforce. A public register is due to be set up this autumn to highlight any listed companies that have faced shareholder opposition to existing or proposed executive pay levels.

As part and parcel of the reforms, the Financial Reporting Council will be asked to amend the UK Corporate Governance Code to ensure better board recognition of employees’ interests. In practice, this will mean firms can choose between assigning a non-executive director to represent the workforce, nominating a director from within the workforce, or overseeing the creation of an employee advisory council.

Long anticipated, the reforms have received direct support from Theresa May, who is on record as describing executive pay as capitalism’s unacceptable face. Greg Clark, the business secretary, has added his support, stating that the reforms will aid transparency and accountability and build on the UK’s already strong reputation.

The TUC is less impressed, regarding the government’s words as little more than hyperbole. In the view of Frances O’Grady, Theresa May is overseeing a significant watering down of earlier promises to suppress corporate excess. Questions have already been raised as to what has happened to the earlier pledge to install workers on executive boards.

The CBI is cautiously supportive and has emphasised the importance of the context for the ratios. It is also anxious to point out that most companies already operate in a fair and transparent manner.

It remains to be seen whether the new law will result in any measurable change to the current state of affairs or whether it risks shifting the focus from any attempt to improve the salary and conditions of the lowest paid.

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