For the purposes of executive pay ratio reporting, how do companies calculate their ratio under option C?

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 C involves a company:

  • using data other than, or in addition to, gender pay gap information to identify three UK employees three UK employees without actually calculating the pay and benefits of all employees, as the "best equivalents" whose remuneration places them on the:
    • 25th percentile full-time equivalent (FTE) remuneration of the company's UK employees (P25);
    • 50th percentile (median) FTE remuneration of the company's UK employees (P50); and
    • 75th percentile FTE remuneration of the company's UK employees (P75).
  • using available data for the relevant financial year to calculate the pay and benefits figures for each of the three best equivalents for the relevant financial year;
  • making any necessary adjustments to the pay and benefit figures to ensure that the best equivalents are reasonably representative of P25, P50 and P75 for the relevant financial year; 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/Y25):1;
    • (X/Y50):1; and
    • (X/Y75):1.

To establish the employees' pay, the company cannot use data from any year before the previous financial year. Where the company has gender pay gap information available, it cannot use other data that is older than its gender pay gap data.

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".

However, 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.