Form Over Substance? An Investigation of Recent Remuneration Disclosure Changes in the UK

Director remuneration contracts, which aim to link pay with performance, constitute an essential mechanism to mitigate agency problems. However, soaring CEO pay, rewards for failure, complexity of pay structures and wage disparity between executives and workers have fuelled public outrage and increased pressure for firms to disclose remuneration information. In 2014, in our sample the average CEO earned £5.57 million in total pay and the ratio of chief executive to average employee pay was nearly 123.

On 1 October 2013, the UK government enacted new rules that required enhanced disclosure in remuneration reports, namely Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. In our study we document the new disclosure requirements and categorise the requirements into presentation and content items. Our sample consists of 91 UK companies, excluding those FTSE 100 companies not incorporated in the UK and thus exempt from the disclosure rules, over three financial years (two pre-reform and one post-reform financial year).

We find that voluntary disclosure focused more on presentation over content changes. In addition, mandatory disclosure on the relative increase in CEO and employee pay was subject to wide management discretion, as firms could self-select their employee comparator groups. Only a minority of firms (27%) examined included employees from all geographic regions and all levels. Some companies chose as the comparator group only an arbitrary percentage of employees or only senior management, others chose employees in certain geographic areas. Also, as firms were not required to disclose the fees paid to remuneration consultants for other services, it is difficult to gauge the consultants’ independence.

We also find that, in the first year of the post-reform period, the regulations did not enhance the link between CEO pay and firm performance, nor curb the degree by which CEO pay was in excess of the average salary earned by employees. The difference between change in total shareholder returns and change in pay also did not improve in the mandated disclosure period. Therefore, the new disclosure regime did not appear to result in fairer pay in society or promote a fairer distribution of profit as it intended.

Finally, we consistently find that firms with high prior years’ AGM dissent on pay have less voluntary disclosure, greater pay, and higher CEO-to-employee pay ratios. This evidence suggests that firms may not effectively respond to advisory shareholder dissent and supports the calls for mandated disclosure and the binding say-on-pay regime introduced in 2013.  Taken together, we question whether the new enhanced disclosure regime is effective in its aim to improve the link between pay and performance. 

Aditi Gupta is a Lecturer in Accounting at King's College London, Jenny Chu is a University Lecturer in Accounting at the Cambridge Judge Business School, and Xing Ge is an alumna of King's College London.