A company must publish how its chief executive’s pay compares with what its staff earn, but the details depend on the country. In the UK, a company with an average of more than 250 UK employees must set the boss’s total pay against three points on its pay scale. In the US, a public company must give one figure: the CEO’s pay divided by the pay of its median employee.

The UK rule: three ratios in a table

The requirement comes from the Companies (Miscellaneous Reporting) Regulations 2018, which added it to the directors’ remuneration report. The count of employees is an average across the months of the financial year, and for a parent company it covers the whole group’s UK staff.

The report must carry a pay ratios table. Each row gives the year, the method the company used, and three ratios. Those compare the CEO’s total pay, taken from the single total figure table, with the full-time equivalent pay and benefits of the UK employees at the 25th, 50th and 75th percentiles. If two people held the CEO role during the year, their pay counts for the time each held it.

The table builds up over time. After the first year, a company must keep showing earlier years in separate rows, up to the nine years before the current one.

Katherine Maxwell, head of employment at Moore Blatch, wrote in People Management that companies must pick one of three calculation methods, known as options A, B and C. She warned that the choice can shift the resulting ratios a long way.

Why Britain brought it in

Maxwell set the rule against figures from the CIPD and the High Pay Centre. Their analysis found that a CEO earned on average 145 times as much as their employees in 2017, against 128 times in 2016. Between 2016 and 2017 median full-time earnings rose 2%, while the average FTSE 100 chief executive’s pay rose 11%. She also linked the rule to the collapse of Carillion, where MPs heard that directors had cared more about their own pay than the business.

The US rule: one ratio in the proxy

The US version implements Section 953(b) of the Dodd-Frank Act of 2010. The Securities and Exchange Commission adopted the final rule on August 5, 2015, in a vote split along party lines. Companies first had to report for their first fiscal year starting on or after January 1, 2017.

A company must disclose three things in its annual proxy statement, according to SHRM:

  • the CEO’s annual total compensation
  • the median annual total compensation of all other employees
  • the ratio between the two

Smaller reporting companies, emerging growth companies and foreign private issuers are exempt. The count includes part-time workers, but a company may leave out up to 5% of its non-US staff, and staff in countries where privacy law blocks the data. It needs to identify its median employee only once every three years, unless its workforce or pay changes in a way that would shift the ratio a lot.