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Boardroom pay

Pay ratios are the latest idea proposed to address public concern over executive remuneration. But will they achieve what proponents intend? David Craik investigates.

Goldman Sachs and John Lewis may seem unlikely bedfellows, but their comparison becomes increasingly strange when the subject of pay ratios is discussed. The issue has soared into public consciousness due to the government’s recent corporate governance green paper, which stresses that for the public to “retain faith in capitalism and free markets, big business must earn and keep the trust and confidence of their customers, employees and the wider public”.

The paper highlights figures that reveal total pay for FTSE 100 chief executives has risen from an average £1m in 1998 to £4.3m in 2015. The ratio of that pay to the average full-time UK employee’s pay was 47:1 in 1998 – but by 2015 it had surged to 128:1. One proposal to address this is the introduction of a new pay ratio reporting requirement.

The ratio, which became a requirement for US listed companies in January, would “enable shareholders, employees and the public to judge how executive pay compares across different companies particularly in the same sector” while also informing shareholders “on whether pay levels are proportionate and reasonable”. 

This is an extract from the Business & Management Magazine, Issue 253, April 2017. 

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