Asset Owner-led Tool Furthers UK Pay Transparency
Framework initially offers assessments of 65 FTSE 100 firms, with full dataset expected early next year and potential international expansion.
A new Fair Reward Framework (FRF) has been released to support investor attempts to scrutinise executive remuneration and fair pay, following more than a year in development.
Initially conceived in late 2022, the tool was created by UK asset owners to offer investors transparent and easily comparable data on how leading companies remunerate their top executives. It is intended to inform and bolster investors’ stewardship activities, including how they choose to engage with companies on executive pay and vote at AGMs. Institutional investors such as pension funds will be able to use the assessments to escalate their interests through their fund managers.
The framework uses 30 metrics to help judge the fairness and proportionality of pay practices at investee firms. These factors include CEO pay awards, pay gaps and ratios, pay scrutiny processes such as worker consultation, the extent of trade union coverage and the results of recent shareholder votes on pay at company AGMs. In total, the metrics are informed by 111 indicators.
“What the FRF brings to the mix is an efficient way of investors, including asset owners, to wade through all of these different annual reports and disclosures,” Clare Richards, Director of Social Factors at the Church of England Pensions Board (CoEPB), told ESG Investor.
“It’s a big undertaking, and the framework synthesises that into one space where investors can look at the different ways in which the company is valuing its stakeholders, and can escalate that, either by its asset manager, or directly to the firm in the case of asset managers and larger asset owners.”
Assessments for 65 companies are available at launch, with the full FTSE 100 data expected to be released by early 2025.
“Cut[ting] through the mass of corporate reports, which embeds necessary efficiencies into stewardship decision making, will help drive more informed discussions about fair pay, and allow the investor the flexibility to pick and choose which indicators are most important to them,” said Leanne Clements, Head of Responsible Investment at People’s Partnership.
Fair pay findings
The framework’s assessment of companies identified key executive remuneration trends at large UK firms including median CEO pay standing at £4.1 million (US$5.4 million), reaching as high as £17 million. Median CEO-to-median employee pay ratio across the sample was 75:1, with the highest being 431:1 and the lowest 13:1.
Last month, a report from the High Pay Centre – which contributed to the FRF – found median FTSE 100 CEO pay in 2023 had set a new record, standing at 120 times the median earnings of a UK full-time worker.
Executive pay proved a thorny issue during the 2024 AGM season. In July, ShareAction and its Good Work Coalition investor members asked Marks & Spencer, Sainsbury’s and JD Sports to pay both direct and contracted employees a real living wage of at least £12 an hour. JD Sports, Tesco, Ocado and a number of other companies and others faced fair pay-linked questions at their AGMs.
Just 6% of the assessed firms disclosed details of any meaningful consultation with their workforce during the executive pay setting process, and only 22% companies provided any evidence of the proportion of their workforce covered by trade union membership or a collective bargaining agreement.
In total, 40% of analysed firms have disclosed their Ethnicity Pay Gap. This voluntary reporting requirement is increasingly likely to become mandatory in the near future, potentially leaving a high portion of FTSE100 companies not “match fit”, said Richards.
“Despite the fact that we have been involved in engaging with companies on ethnicity pay gap reporting, this is still quite a low number,” she noted, pointing out that the Office of National Statistics has been collecting this data since 2012.
The FRF, which emerged from a CoEPB-hosted summit on executive pay, was informed by a consultation which ran between September and November last year.
Eleven UK asset owners contributed to the FRF’s creation, including the CoEPB, Brunel Pension Partnership, People’s Partnership, Scottish Widows, Nest and Railpen.
“It’s important to look at income inequality as a systemic risk, going and checking within holdings to see how the companies that we are invested in are actually playing their part in mitigating risks,” said Richards.
A complex conundrum
In April, the CoEPB’s Deputy Chief Responsible Investment Officer Stephen Barrie said the framework was set to be unveiled in the next month or so, at ESG Investor’s 2024 Stewardship Summit, but the launch ended up being pushed back.
“The length of time this has taken is in itself testament to how complicated this is,” said Richards. “The fact that it’s so complicated to locate information and put it in into of standard form reflects the value add of the FRF, introducing a level of efficiency into the process for engagement.”
To offer good sample of data to users, the first edition of the framework includes two financial years, while in future it will only address one.
“It’s a pilot, but to stress test it we needed the time to check things over, to be able to put something out for external testing that we’re pretty comfortable and confident with, as well as true to the feedback that we received in the public consultation,” said Richards.
“We’re doing this to help investors to be effective in allocating resources into these conversations. We hope to see some of these metrics move and trends emerge, as well as better practice and disclosure on non-mandatory metrics,” she added.
At the end of this month, a webinar will discuss the key points and uses of the framework. In Q4, the consolidation and expansion of the FRF will be explored, incorporating feedback from users. Future plans also include expanding to companies in other markets, such as the US.
“We invite asset owners, managers, companies and others that will be using this tool to provide feedback in terms of how they are using it and what kind of development they might want to see in the future, in terms of adjustments to indicators or more coverage of more companies within the UK or other market to enhance the usability of the framework,” said Richards.
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