In line with the shift towards greater transparency around pay, Prime Minister Theresa May recently announced plans that would require listed companies to publish the ratio between the total remuneration of their chief executive and their average worker. As usual, the aims of such a move are admirable, but their execution leaves much to be desired. I’m sceptical whether the rules in their current state will help or hinder companies demonstrate the fairness (or otherwise) of their current pay arrangements, because such a simplistic measurement is easily misunderstood.

By forcing companies to disclose their pay ratios, the government intends to put public pressure on companies to justify senior managers’ remuneration. Yet bringing that pressure to bear will require the media to make a sophisticated interpretation of a potentially misleading figure and communicate it effectively to the wider public. It’s a lot to ask, and therefore it seems likely that CEO-worker pay ratio reporting won’t achieve its objective of greater public awareness of bad pay practice.

Much like gender pay reporting, it’s not enough to know if such a gap exists, but why, and how it might be corrected. Without context and narrative, knowing that a CEO earns 250 times as much as the average worker is just meaningless data. The huge salaries involved distort public perceptions of fairness, but highly skilled and experienced leaders in certain industries do merit large salaries relative to their more junior employees. For example, there may well be a newsworthy gap between a company’s CEO and average worker pay, but it could be justified if the CEO founded the business, took on all the risk and continues to run the business day-to-day. Sensationalist reporting of a single figure means that these complexities are lost in translation.

We’ll have to look across the pond to see how these proposals will work in practice. In 2018, the Dodd-Frank Act will require US public companies to disclose the median of the annual total compensation of all employees, the annual total compensation of the CEO, and the ratio of those two amounts. Much of the opposition to this legislation in the USA has centred on the fact that pay ratios often don’t compare across companies. Retail and manufacturing companies, for example, depend on a large pool of low-paid workers with a relatively unskilled background, which means their pay ratios will look high when compared to an investment bank with lots of well-paid professionals filling the lower ranks. Here the CEO-worker pay ratio has the potential to mislead an uninformed audience, by obscuring the fact that a smaller ratio does not always signify fairer pay arrangements.

Without more robust legislation which demands that companies contextualise their figures, CEO-worker pay ratio disclosure is unlikely to achieve greater fairness or transparency. Simplistic reporting hides the subtleties involved in calculating executive pay and doesn’t allow the public to compare salaries properly across industries. Furthermore, this weak legislation means that companies are only telling one part of their story.

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