Direct CEO/Employee comparison ‘a blunt tool’ and will undermine Government efforts to create a fairer UK
Concerns over excessively low employee pay and the perception of excessively high executive pay are best addressed by comparing CEO and average employee pay to the UK’s Living Wage says Mercer, in their response to the Government’s Review on Corporate Governance.
A direct CEO/Employee comparison says Mercer, is a blunt tool that, as the Green Paper notes, has many serious drawbacks, including undue administrative burdens, creation of spurious comparisons and incentive to outsource or even offshore low paid jobs. It will undermine faith in the government’s efforts to create a fairer society.
According to Mark Quinn, Head of Mercer’s Career business, “It’s likely that some form of CEO pay ratio disclosure will become mandatory for UK PLCs within the year; many shareholders are already calling for it and we support Government efforts. However, current proposals are too blunt and will prompt inappropriate comparisons, thereby undermining the intent to make our society fairer. We believe that the best route is for companies to compare CEO and average employee pay with the UK’s living wage, not against each other. This is the best method of identifying whether companies take a comprehensively fair approach to pay throughout their structure.”
Mercer’s main concern with current proposals comes with the concept itself which the consultancy sees as being open to misleading comparisons. To use a simplistic example: a complex, international retail business which employs lots of part-time, temporary workers and older workers may have a high CEO/Employee ratio. In contrast, a UK hedge fund may have a very high median pay level and therefore a low CEO/Employee ratio. Instead, Mercer believes that the government should require companies to disclose the proportion of their employees that are paid below the National Living Wage and the proportion paid more than twice the National Living Wage.
The consultancy has highlighted additional challenges that will be faced whatever route is chosen by the Government. The sample of employees and the elements included/ excluded from the calculation of employee and CEO reward will be critical. If the employee group is global, then UK companies with large operations in developing regions - where wages are lower than the UK – will have higher ratios.
According to Gordon Clark, Remuneration Partner at Mercer Kepler, “Comparisons based on the single figure for total remuneration will be volatile and result in high ratios in years where company performance has been strong.”
Mercer is advising companies to consider how employee and CEO pay might best be measured. Median employee pay, favoured in the Government’s consultation, will be a very material administrative burden for large international organisation. This is because company processes and reporting systems are currently not designed to easily provide this information.
Notes to Editors
Mercer’s full paper on the issue, ‘The Pay Ratio is Coming, Let’s Make It Rational’, can be found here.
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and careers of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 43 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With annual revenue of $13 billion and 60,000 colleagues worldwide, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer. In the UK, Mercer Limited is authorised and regulated by the Financial Conduct Authority.