For the purposes of executive pay ratio reporting, how do companies calculate their ratio under option A?
The Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860) introduce a requirement for quoted companies with more than 250 employees to publish the ratio between their CEO's total remuneration and employees' pay and benefits in their directors' remuneration report. Companies are required to choose one of three options (A, B or C) for calculating their executive pay ratio. Option A involves a company:
- calculating the pay and benefits of all its UK employees for the relevant financial year, with reference to a date that is no earlier than three months before the end of the relevant financial year;
- ranking the UK employees from lowest to highest, based on their pay and benefits;
- identifying three individuals (referred to in the legislation as P25, P50 and P75) who are on the:
- 25th percentile full-time equivalent (FTE) remuneration of the company's UK employees;
- 50th percentile (median) FTE remuneration of the company's UK employees; and
- 75th percentile FTE remuneration of the company's UK employees; and
- taking the CEO's total remuneration (a figure referred to in the legislation as X) and the pay and benefits (figures referred to in the legislation as Y25, Y50 and Y75) of these three individuals to calculate the pay ratios as:
- (X/Y50):1; and
The Government's guidance describes option A as "the most statistically accurate method for identifying the pay ratios". The guidance recommends that companies use option A wherever "possible and reasonable".
While option A is the recommended method, option B and option C are alternative methods that allow companies to identify P25, P50 and P75 without having to calculate and rank the total pay and benefits of every UK employee.