There is a new legal trend sweeping many parts of the world—compensation reporting.
This trend is part of an increasingly global effort intended to encourage more fair compensation practices, and to hold companies accountable that fail to take steps at narrowing two common pay gaps—one between men and women, and one between senior executives and average employees.
The theory behind these regulatory and legal moves is that increased transparency on what companies are doing—or not doing—will ultimately lead to more equitable pay. While we are still in the early days of understanding how broad these pay gaps are, and what measures will be most effective at closing the gaps, large and mid-sized companies are already taking notice.
However, just like with any new regulatory efforts, there is significant dispersion from country to country (and sometimes even state to state in the U.S.) in terms of how different countries are approaching this problem. For global employers, understanding the nuances of each approach may help signal what reporting requirements are likely to become an industry standard in the coming years.
Examining the different approaches to compensation reporting
Governments are increasingly aware of the importance of fighting income inequality and achieving fair and equitable pay throughout each country’s respective labor markets.
Research by the accounting firm PwC predicts that if nothing is done about the gender pay gap, it could take nearly a century for the divide to close entirely across the Organization for Economic Cooperation and Development (OECD), a group of rich countries that includes the UK.
Several countries, including most recently the UK, are now taking active steps to try close that gap even sooner.
The UK became the latest country to institute compensation reporting requirements when it released the results of its gender pay gap study on April 4. The study itself was a part of the Equality Act 2010, which means companies with more than 250 employees had about eight years to prepare.
Predictably, the study found that men are being paid more than women, with a 9.8% median pay gap. Altogether, almost eight in 10 companies pay men more than women, with particularly wide gender pay gaps in the construction, finance and insurance industries.
While the results of the study grabbed headlines, this is far from the first attempt by a country to increase compensation reporting. In fact, several other countries have instituted similar policies, with varying results, for much of the past decade. Here is a sampling of recent attempts to close the gender pay gap and the executive-employee pay gap from around the world.
- EU—Set to go into effect on June 10, 2019, the Amended Shareholder Rights Directive (‘SRD’) is the EU’s answer to the rising gap between executive pay and employee pay. The rule will give company shareholders a right to approve the (forward-looking) remuneration policy for directors at least every four years or in the event of a material change in policy, with companies only able to pay remuneration on the basis of approved policy. Member States, however, will have the possibility to opt for an advisory vote, allowing companies to apply a remuneration policy rejected by shareholders, with the requirement to submit a revised policy at the next general meeting. Once implemented, the SRD will affect more than 8,000 listed companies in EU regulated markets, representing more than $8 trillion in combined market capitalization.
- Germany—The German Pay Transparency Act came into force on July 6, 2017, putting into place a series of principles designed to help close the gender pay gap. For companies with more than 200 workers, every employee now has the right to information regarding the criteria used to determine his or her remuneration and the remuneration of employees in similar positions. Companies that fail to comply with these requests may have to provide evidence in court that there is no infringement of the equal pay principle. Meanwhile, companies with more than 500 workers are asked to implement certain measures to review and achieve pay equality, as well as to issue an equal pay report at least every three years. The first of these reports will be due later in 2018.
- Belgium—Belgium has a long list of compensation reporting requirements for listed companies, including a so-called “remuneration report” that must include detailed information on the annual compensation for the CEO and nonexecutive directors, and aggregate compensation information for executive managers. However, these requirements do not extend to non-listed companies. As for gender equality, since 1987 employers have been required to prepare a general report concerning gender equality on an annual basis. In 2012, Belgian legislators introduced a series of measures to help further reduce the gender wage gap, including requiring Belgian companies to provide a detailed breakdown of the difference between how men and women are compensated, employed and tasked.
- Netherlands—In the Netherlands, there is a legislative proposal currently under deliberation that calls for an annual meeting to inform the works council of the differences in remuneration of directors and employees for companies with at least 100 employees.
- Iceland—Iceland has gone further than perhaps any other country, with the government committing to completely close the nation’s gender pay gap by 2022. Currently, companies with more than 25 employees are required to submit themselves to external audits to prove that they are paying women on par with men for equal work, a move made in January 2018 in response to mass protests by women in October 2016.
- Australia—Australia has several rules in place to ensure equitable pay across the corporate structure. Since 1998, publicly listed companies have been required to publicly report the compensation paid to their senior executives. Since 2012, companies with over 100 employees have been required to report on gender pay gaps, and companies with greater than 500 employees must have a formal policy or strategy in place for dealing with gender pay issues. These requirements are even stricter for financial institutions, with a new legislative regime known as the BEAR (Banking Executive Accountability Regime) overseeing compensation practices and disclosures. There is now also a growing debate within the Australian government about instituting mandatory CEO ratio reporting, following in the footsteps of the U.S.
- United States—As for the U.S., the world’s richest country has also made moves towards pushing for more fair wage practices. Starting in 2015, most U.S. public companies have been required to report their CEO pay ratio, or the ratio between how much the CEO is paid versus the median employee. This mandate was included as part of the 2010 Dodd-Frank Act. A survey by Equilar found that the median CEO pay ratio was 140 to 1 and the average CEO pay ratio was 241 to 1. In nine U.S. states (including New York and California) and eight localities, there is now also a restriction against asking potential employees about their salary history. This law is intended to protect workers, particularly women and minorities, from further salary discrimination, ultimately providing them with more leverage in the labor market.
All this raises the question of if or when there will be homogeneity in how different countries approach compensation reporting. In the short-term, this is unlikely. The vagaries of each country’s labor market are closely linked to each country’s culture, which means the definition of “fair” can vary widely.
But in the long-term, the push for increased compensation reporting is likely to converge around two central objectives: (1) narrowing the gender pay gaps at large and medium-sized companies, and (2) reducing the difference between CEO pay and median employee pay. A potential third objective is restricting questions about an employee’s history, although only time will tell whether the efforts undertaken by some U.S. states will result in meaningful change.
There is as of yet no consensus on the best way to achieve these objectives, which means countries are likely to continue to learn from each other and adapt their reporting requirements as necessary. Politicians have not been shy about pointing to legal models in other countries as evidence of what policies should be implemented domestically, and this practice is likely to continue as policymakers accumulate more data on compensation practices around the world.
The overall trend is clear—more reporting, more transparency and stricter requirements. Global employers concerned about the impact of these requirements on their business can get a head start now by taking active measures to push for equitable pay. The alternative—waiting to see what each country does—may result in companies losing their competitive position as other businesses embrace the future.
Brian Jebb is a partner and head of the U.S. Employment & Benefits practice at Allen & Overy, and Sarah Henchoz is a partner in the London office, at Allen & Overy. They both specialize in issues that affect global employers.