Government forces UK's biggest firms to justify pay gap

Government forces UK's biggest firms to justify pay gap

The UK's biggest businesses will soon have to justify pay gaps between bosses and their workers, after a reform in the law.

For the first time ever, listed companies will legally be required to annually publish and justify pay differences between chief executives and their staff.

The directors of all large companies will also have to set out how they are acting in the interests of employees and shareholders, under new laws to be laid in parliament today (Monday).

Reporting is part of the government’s modern Industrial Strategy, designed to make sure the UK retains its attractiveness as a place to invest and do business.

The new regulations are part of a package of reforms aimed at holding big businesses to account for the salaries they pay.

Greg Clark, business secretary, said: “One of Britain’s biggest assets in competing in the global economy is our deserved reputation for being a dependable and confident place in which to do business.

“Most of the UK’s largest companies get their business practices right but we understand the anger of workers and shareholders when bosses’ pay is out of step with company performance.

“Requiring large companies to publish their pay gaps will build on that reputation by improving transparency and boosting accountability at the highest levels, while helping build a fairer economy that works for everyone.”

The changes mean UK listed companies with more than 250 UK employees will have to disclose and explain this difference - known as ‘pay ratios’ - every year.

This follows concerns some chief executives have been receiving salaries that are out-of-step with company performance.

Lord Duncan, UK government minister, said: “Improving transparency and accountability in this way, plus other initiatives such as giving employees a voice in the boardroom, will help create a more equal and fair society while ensuring that the UK remains a world-leading place to invest and do business.”

The new laws will also require large private companies to report on their responsible business arrangements and require listed companies to show what effect an increase in share prices will have on executive pay to inform shareholders when voting on long-term incentive plans.

Chris Cummings, chief executive of the Investment Association, said: “The UK has a global reputation as a leader in corporate governance and we welcome today’s package of reforms as they focus on the long-term interest of all company stakeholders, including shareholders and employees.

“Investors are demanding greater director accountability and transparency on executive remuneration.

"Pay ratios will shine a spotlight on what executives are being paid compared with their workforce, and investors will expect Boards to articulate why the ratio is right for the company and how directors are fulfilling their duties.”

The new laws follow last year’s corporate governance reforms which sought to increase boardroom accountability.

Subject to parliamentary approval, the regulations will come into effect from 1 January 2019 meaning that companies will start reporting their pay ratios in 2020.