UK: New Regulations For Pay Ratios

Last Updated: 6 July 2018
Article by Peter Swabey

The government has introduced new regulations around pay ratios and remuneration, section 172 and governance for large companies

In the government’s response to the Green Paper on corporate governance, prime minister Teresa May lauded the UK’s corporate governance system as ‘envied and emulated around the world’, before asserting that we must not rest on our laurels but continue to improve. Citing examples where business was falling short of the desired standards, she added: ‘In some companies, executive pay has become disconnected from the performance of the company itself.

In others, some directors seem to have lost sight of their broader legal and ethical responsibilities. There is a worrying lack of transparency around how some large privately held companies behave.’

Building on this call to action, the government tasked itself to produce secondary legislation to require:

  • Premium listed companies to disclose the CEO to UK workforce pay ratio
  • Companies to provide a clearer explanation of remuneration outcomes
  • All listed and private companies ‘of a significant size’ to explain how their directors have performed their duties under section 172 of the Companies Act 2006 (CA2006)
  • All companies ‘of a significant size’ to disclose their corporate governance arrangements. For premium listed companies, existing reporting requirements take precedence.

To this end, the Companies (Miscellaneous Reporting) Regulations 2018 (the Regulations) were published on 11 June. Subject to their approval in parliament, the regulations address these actions and it should be noted that Part 4 of the regulations extend many of these requirements to community interest companies. The new requirements apply to financial years beginning on or after 1 January 2019.

Pay ratio

Part 3 of the regulations amends the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (the 2008 Regulations), while regulations 15–19 amend Schedule 8 of 

the 2008 Regulations, relating to the quoted companies directors’ remuneration report, with paragraph 17(b) introducing new paragraphs 19A–19G to the schedule.

Paragraph 19A requires that companies with an average of more than 250 UK employees must include in their directors’ remuneration report the pay ratio information specified in paragraphs 19C to 19G.

Paragraph 19B provides a detailed mechanism for calculating the average number of employees and provides that, where the company is a parent company, the average number of UK employees refers to the number of UK employees within the group.

“A remuneration report that runs to more than 20 pages is indicative of an overcomplicated policy”

Paragraph 19C gets to the nuts and bolts, with details of a prescribed pay ratios table; paragraph 19D provides details of the three approved methods of calculating the pay ratio; and paragraph 19E, 19F and 19G require further information, including an explanation of why the method has been chosen 

and an explanation of significant changes.

It is all very detailed and the best suggestion that I can make is that you review the regulations yourself on the government website.

Overly complex

Although I understand the need to be clear about the reporting requirement, so that all companies report on the same basis, I wonder whether this is overly complex.

Given that the members of the BEIS select committee were challenging companies as to whether a remuneration report that runs to more than 20 pages is indicative of an overcomplicated policy, the necessity for reporting yet more data and tables needs explanation. 

A pay ratio is certainly a useful piece of information when considering executive pay policy, but there are mixed views whether this is the best way to do it. Professor Alex Edmans at London Business School has commented that the ‘UK pay ratio disclosure is illogical’, arguing if the purpose is to address concerns CEOs have been receiving payments that are not linked to company performance, a better solution would be to report the link between pay and long-term performance than to worker pay.

On the other hand, there are voices in the trade union world that have welcomed the new regulation as a shift away from the focus on the shareholder.

In our response to the green paper, we commented that: ‘The disclosure of pay ratios would be an interesting statistic and would provide useful information for and about a company when compared over a period of time. It should not be used to enable comparisons between companies for the reasons set out below. In our view, there are a host of other metrics, disclosure of which would be more meaningful and effective.’

These would include a comparison of:

  • Non-salary elements of pay
  • What companies do for their other employees, compared with executives, in terms of pension and other benefits, including share plans
  • The level of salary increase of employees generally with the increase awarded to the executives 
  • The pension contributions provided to the executives with the pension contributions companies provide to other employees.

These measures are readily comparable and could be easily understood.

The main problems with pay-ratio reporting would be around how it is represented – that is, the degree to which it is assumed to mean something it does not, a problem we have seen recently with political and press reaction to gender pay gap reporting – and the potential for unintended consequences, such as incentivising outsourcing and offshoring of lower paid work and the impact on CEO recruitment and retention.


The same part of the regulations introduces other changes to the directors’ remuneration report, which are intended to offer this enhanced clarity. Regulation 16 requires that the report include ‘any discretion which has been exercised in the award of directors’ remuneration’.

“These measures are intended to prevent either companies or investors saying they never anticipated a particular pay award could be so high”

Regulation 17(a) requires that the single total figure table indicate ‘the amount of the award or, where this is not ascertainable, an estimate of the amount of the award, that is attributable to share price appreciation’, alongside how the level of award was determined and whether discretion has been exercised as a result of change to the share price.

Regulation 18 goes on to require that where a performance target or measure relates to more than one financial year, the report indicates for each executive director ‘the maximum remuneration receivable assuming company share price appreciation of 50% during the relevant performance period’ and the basis on which this calculation has been made. 

It can only be assumed that these measures are intended to prevent either companies or investors saying they never anticipated a particular pay award could be so high.

Section 172 duties

Part 2 of the regulation amends CA2006 to insert new requirements for the strategic report. Regulation 4 introduces a new section 414CZA, which does not apply to medium-sized companies (as defined in CA2006) and requires the strategic report to include a statement describing how the directors have had regard to the matters set out in section 172 (a) to (f) when performing their duty to promote the success of the company. Regulation 5 provides that this statement must be made available on a website. 

The government have also addressed this issue in Part 3 of the regulations. Regulation 13 amends Schedule 7 to the 2008 Regulations and will require the directors’ report of any company (or group of companies) with more than 250 UK employees to contain a statement describing the action taken during the financial year to:

  • Provide employees systematically with information on matters of concern to them as employees
  • Consult employees or their representatives on a regular basis so the views of employees can be taken into account when making decisions that are likely to affect their interests
  • Encourage the involvement of employees in the company’s performance through an employees’ share scheme or by some other means 
  • Achieve a common awareness on the part of all employees of the financial and economic factors affecting the performance of the company.

It must also summarise how the directors have engaged with employees and how the directors have had regard to employee interests, and the effect of that regard, including on the principal decisions taken by the company during the financial year.

For the avoidance of doubt, ‘employees’ in this sub-section are UK employees, and there is the usual exemption from disclosing ‘information about impending developments or matters in the course of negotiation if the disclosure would, in the opinion of the directors, be seriously prejudicial to the interests of the company’.

“There is the potential for unintended consequences, such as incentivising outsourcing lower paid work”

Companies with more than 250 UK employees, or who have a turnover of £36 million or more, or a balance sheet total of £18 million or more, must also include in their directors’ report ‘a statement summarising how the directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others, and the effect of that regard, including on the principal decisions taken by the company during the financial year.’ Again, there is an exemption for disclosures the directors believe would be seriously prejudicial to the company.

Large companies

Regulation 14 goes on to insert a new Part 8 of Schedule 7 to the 2008 Regulations. This applies to all companies with 2,000 employees or more and/or with a turnover of more than £200 million and a balance sheet total of more than £2 billion. This is unless they are subject to the Disclosure and Transparency Rules, or are a community interest company or a charitable company. 

For these companies, the directors’ report must include a statement covering which corporate governance code, if any, the company applied in the financial year and how it was applied.

Alongside this, it must also state whether the company departed from such a code – and if so, how and why. If the company has not applied any corporate governance code, the statement must explain why not and also what corporate governance arrangements they did apply. Again, this statement must be made available on a website. 

All in all, there are some very complex changes being proposed here, with a variety of thresholds at which different requirements bite. Those responsible for company reporting should carefully read the regulations and make sure they will be able to comply from the effective date. The Department for Business, Energy and Industrial Strategy are publishing guidance to help.

Peter Swabey FCIS is policy and research director at ICSA: The Governance Institute

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Shepherd and Wedderburn LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Shepherd and Wedderburn LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions