UK: Crackdown On Excessive Boardroom Pay – As Easy As Publishing A Simple Ratio?

The theory: work out the average worker's pay in a company, calculate the ratio between that average pay and the CEO's pay, and then, if the ratio is large, name and shame the company and its overpaid boss.

In terms of looking at ways to deal with excessive boardroom pay this theory looks like a good one and, in fact, the US is also contemplating doing something similar. Theresa May wants to implement this in the UK and is to include it as part of a package of corporate reforms to be announced shortly. However, practically, a simple ratio may not have the desired effect.

In practice, a company with larger numbers of well-paid staff will have a smaller (and therefore "better") ratio than a company with larger numbers of lower-paid staff. This issue was dubbed the "Goldman-Waitrose issue" by Vince Cable when he was considering implementing similar changes. He ended up abandoning the ratio idea because of this issue.

Theresa May, however, appears to be committed to implementing the publication of this ratio. Officials are currently looking at how the ratio is calculated, in order to try to make it more effective. Presumably they are looking at ways to overcome the "Goldman-Waitrose issue", as well as looking at how to include other factors that could otherwise distort the ratio (for example the disparity of average wages between London and the regions). So it looks as though, in order for the ratio not to be misleading, the calculation will need to be more sophisticated than perhaps initially first thought.

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