Consumer outlook for 2018
5 January 2018
The impact and fallout of the Brexit vote has dominated the headlines for the past year as negotiations continue. This backdrop of uncertainty has affected consumer confidence throughout the year; and the rise in inflation has led consumers to tighten their belts when purchasing non-essential items.
Beyond Brexit, consumer businesses are facing challenges such as the increase in the National Living Wage (set for April 2018), which will impact their bottom line; as well as responding to changes in consumer habits and remaining competitive.
We saw a number of businesses succumb to trading conditions in 2017 and there’s no doubt there are new challenges on the horizon for 2018, however as an innovative industry there are also opportunities for businesses to respond and adapt.
In this outlook, we take a look at trends, legislation and issues we’re set to face in 2018. And I’d like to take this opportunity on behalf of our international Consumer sector team, to wish you a very Happy New Year.
Technology will continue to disrupt the retail market and companies need to remain agile in order to remain competitive. Mobile commerce will continue to grow – UK sales were set to increase 28.4% to reach £35.31 billion in 2017. Retailers will need to continue to respond to consumer demand; as was the case for 2017 with the introduction of checkout free stores, same-day and even 1-hour delivery options. There will also no doubt be an increase in the number of companies developing voice activation applications to work with Alexa, Siri, Cortana and Google Assistant.
Artificial intelligence and robotics will continue to be adopted by retailers. Asia, China and Japan account for 69% of all robot spending; the increase is a result of the demand for speed and efficiency, giving businesses a clear competitive edge as well as helping drive customer loyalty.
We’ve seen retailers draw in customers by making use of their surplus retail space, on the one hand offering convenience such as Sainsbury’s incorporating Argos counters in-store, to developing ‘shopper experiences’ such as Next’s joint venture with Gino D’Acampo and Individual Restaurants to open Prosecco bars and restaurants in-store.
While many retailers have had to tighten their belts to operate in the challenging environment we saw in 2017, it has been a different story for luxury brands. Chinese and millennial shoppers helped drive strong sales, demand for shopping mall space has maintained, and we’ve seen a number of M&A deals including Ineos’ purchase of Belstaff and Foschini Group’s purchase of Hobbs.
Food and beverage
There is no sign of the health and wellness trend slowing down, with fresh fruit and vegetables expected to perform well in 2018, as well as healthier prepared food options -in fact this message feels like a repeat of the last few years. However food price inflation – which has still not been fully passed through to consumers – is expected to continue, posing a real concern for supermarkets and food manufacturers. As this inevitably filters through to consumers, spending habits are also predicted to shift to focus on essentials. Staples such as bread, rice, cereals and pasta are therefore set to do well, as well as private label goods. Retail pricing keenness will be a factor in consumers’ buying habits as inflation outstrips wage growth and there are predicted regulator pressures on consumer credit provision. At least one retailer has begun to explore reducing food waste by offering foodstuffs beyond their best before dates at highly-discounted prices.
The UK online grocery market is still poised for strong growth over the next few years, with many players now moving towards same-day delivery or expanding click and collect offerings. Of course Brexit continues to raise challenges for food retailers and manufacturers in terms of access to markets, regulation, workers, supply chain and prices. The commencement of post-Brexit trade talks this Spring will be closely watched.
Food manufacturing is set to be one of the industries most affected by artificial intelligence technologies. Those who embrace the technology now could see the biggest returns in the future, though a balance will need to be struck in particular with the economic implications of AI as fewer workers may be needed. Conversely the contribution that AI will be able to make towards hygiene and safety through intelligent rather than automated cleaning, for example, should save manufacturers significant costs.
Progress on Brexit should not overshadow a major review and likely overhaul of domestic food regulation in the UK. This work has been under way for some time led by the Food Standards Agency (FSA) but is beginning to crystallise. The direction of travel is towards leaner but more flexible and responsive regulation, greater stakeholder input from consumers and the industry, and for effective and compliant businesses to be recognised. The FSA is targeting a 2020 readiness date for a new system and a post-Brexit implementation plan to follow.
Hospitality and leisure
Global hotel operators are reported to have enjoyed strong trading in 2017, underpinned by an increase in overseas leisure travel. Notwithstanding this, there is an expectation of more modest levels of growth for 2018 with RevPAR growth to be between 1-3%, as the impact of new market entrants, new hotel openings and global political volatility comes into play. In the UK, the devaluation of the pound has encouraged tourism and driven trading growth. Brexit policy uncertainty is a key factor which is expected to impact on profitability and occupancy levels for UK hotels in 2018 and beyond.
Consolidation will be a continuing theme in the restaurant and leisure sectors. The eating and drinking out sectors, in particular, faced a difficult trading period in 2017, given pressures on the increasing price of raw materials and rising operating costs, such as business rates.
Technology, big data and cyber security will be opportunities and challenges that continue to face the sector. With profitability in the hotel sector said to be running at its highest for over 30 years, big data will enable hotels to make smart decisions to grow revenue, cut costs and streamline operations.
The sector also saw an increase in regulation in 2017 and this is expected to have further impact in 2018. The UK’s Competition and Markets Authority launched an investigation into online booking platforms, and how these platforms operate. Pressure has also been applied to gambling firms as the Government launched a 12-week consultation in 2017 in order to promote responsible gambling.
Retailers, of course – long before many other sectors – have understood and embraced the digital revolution. In 2018, retailers will continue to push to deliver the best customer experience via omnichannel and by embracing new technologies.
Technology will continue to both enable and potentially hamper the consumer sector and we look at the following technology and issues:
- robotics and artificial intelligence
- augmented reality and virtual reality
- additive manufacturing
- browsing slow-down
- cyber and privacy
Using artificial intelligence in the back office is a rising trend for businesses in the consumer sector, from tracking data to making back office applications more efficient; adopters will need to ensure their contractual provisions are fit for purpose for this type of technology.
We have started to see robots on shop floors to attract and delight customers and we see this trend continuing in 2018, albeit slowly.
AI legislation arrived in parts of the world in 2017 and we expect to see it introduced in more countries this year; the laws however are likely to be disparate across different jurisdictions. Global retailers will have to consider the impact on procurement and use of technology in relation to product liability and insurance positions but also in relation to intellectual property ownership.
Perhaps the largest positive revolution for the retail sector is the use of AI, telematics and robotics in the supply chain to drive efficiency and just in time methodology. Retailers, particularly those with a strong e-commerce presence, in the goods, as well as food, industries are likely to make bigger investments in this area.
Careful consideration will need to be given to the use of connected environments to support supply chain technologies and to the legal implications around cyber security and data protection, as well as insurance and product liability.
We are also starting to see legislation around the use of driverless and automated technology, specifically in relation to privacy considerations. Businesses need to be aware and factor this in when looking to adopt this technology given the consumer impacts and the heightened legislative focus on cyber and privacy.
As retailers push the envelope in terms of customer experience, we envisage adoption of augmented reality and virtual reality to be more widespread in 2018, albeit cautiously until more use cases and the capabilities for the sector are better developed and understood.
Additive manufacturing has taken off more slowly than expected, however there is lots of potential for the sector. We expect to see adoption grow on an exponential basis; companies embracing the technology will need to consider product liability as well as technology and intellectual property considerations brought about by the hardware and software elements.
The consumer sector is of course becoming increasingly data-focused particularly given the more widespread adoption of connected and tracking technologies. Companies that don’t tap into using data to reach more customers or tailor the customer’s experience will likely miss out.
Social media companies are increasingly likely to capitalise on the collection of data to tailor user experience and increase ad revenue. Everyday household devices are becoming ‘smarter’ and the Internet of Things technology makes it easy to collect consumer data.
The collection and use of data does come with an important responsibility. With less than six months to go until the EU’s General Data Protection Regulation (GDPR) comes in to force, focus on compliance with personal data rules is key (see more on GDPR specifically below).
It will be very important to keep track of changing legislation and guidance around use of personal data and cyber, and potential expectations around security and security breach reporting as a result.
Data breaches are beginning to be commonplace and concerns over security and data breach is likely to be a top table issue for the sector. Embracing good technology is obviously fundamentally important, but so is ensuring that your current and future contracts have the necessary immediacy in terms of your suppliers helping you with data breach notifications and minimising the impact. We are seeing more companies dealing with the need to have thought through how they will deal with a data breach, particularly one which involve consumers, including their potential PR response. Only time will tell if the data breaches and leaks we heard about in 2017 impact the way consumers use these technologies but, for now, it does not seem to have deterred consumers.
On 14 December 2017, the Federal Communications Commission decided to undo net neutrality protection – where internet service providers are required to treat all online content equally.
There has been widespread pushback and US lawmakers have contemplated bills to implement local net neutrality protection. Retailers will be watching these developments, concerned about having fair access and no slow-down of speed on their sites, which could undo some of their hard work around their online investment.
Since our last outlook there has been much talk of the impending EU General Data Protection Regulations and many of you will be well on your way to preparing for the 25 May 2018 deadline. We have posted a number of articles and we have a dedicated GDPR hub so if you are in need of more information please click the links.
In association, the UK Data Protection Bill, which is currently making its way through parliament, is also intended to come into effect from the same date. It will replace the Data Protection Act 1998 and implement UK specific derogations to the GDPR, as well as covering aspects that the GDPR does not cover, such as law enforcement. It also sets out the new powers and responsibility of the ICO. More details can be found in the Data Protection Bill overview.
The e-Privacy Regulation is another making its way through the EU legislative process. This legislation covers email/text/telephone marketing, but also data collection and processing from online activities, such as instant and social media messaging, cookies and related tracking software, traffic and location data. Negotiations of the regulation are underway between the European institutions, but these are set to be difficult, with some significant lobbying taking place on all sides. It’s therefore unclear as to whether it will come into effect prior to Brexit. We expect that in any event it will be implemented in the UK, but this is definitely one to keep an eye on in 2018. The proposed changes could pose a significant challenge for consumer companies, particularly online retailers.
Finally for data privacy issues, the Irish High Court has referred questions regarding the use of Standard Contractual Clauses for international data transfers to the European Court of Justice (ECJ) – if the ECJ considers that they do not provide adequate protection for personal data, this will be a significant challenge for business.
At the end of 2017, the UK Government and the European Commission declared that sufficient progress had been made in the first phase of Brexit negotiations to move on to trade negotiations. Future trade agreements will have a huge impact on the consumer sector and will be high on the agenda for many businesses in 2018, hoping a positive agreement will be reached.
As President Tusk stated, “the most difficult challenge is still ahead”. EU trade agreements have historically taken years to negotiate, but as the UK’s laws and regulations are already aligned with EU law and are likely to remain so during any transitional arrangement, it is hoped that a trade deal between the UK and the EU will be reached much more quickly.
Any future trade agreement between the EU and the UK can only be finalised and concluded once the UK leaves the EU.
As well as trade, immigration rules that arise from Brexit will also be important for the sector since 31% of the workforce in the food production industry and 14% overall in the retail, hotel and restaurant industries in the UK are migrant workers. Many of those jobs require a relatively low level of skill and the present immigration system to sponsor workers from overseas is not likely to accommodate such workers in future. Understanding the new immigration requirements will be necessary for the sector to anticipate this change.
The EU Withdrawal Bill is likely to be passed in 2018. This will repeal the European Communities Act and transpose immigration measures into domestic legislation. There may be a need to utilise the “Henry VIII powers” envisaged within this Bill to amend immigration law which would otherwise not be enforceable. Most of the new immigration requirements are likely to be specified within Statutory Instruments.
Several other important legal changes are anticipated in 2018 regarding immigration law. From late 2018, citizens of EEA countries should be able to apply for “settled status” to confirm their right to live and work in the UK after Brexit and it will ultimately be necessary for all citizens of EEA countries (other than the Republic of Ireland) to obtain this. The Migration Advisory Committee is assessing the impact of Brexit on immigration and will use this to make recommendations about the future immigration system to be implemented in the UK after this date. A Government White Paper which will formally set out the proposed immigration system is anticipated following publication of that report.
The main outstanding issue on citizens’ rights is whether UK citizens will automatically be able to move from one EU Member State to another and maintain all of their current EU rights after Brexit.
The agreement on citizens’ rights will be enshrined in the Withdrawal Agreement, which will be binding on the EU and its Member States, and implemented into UK law. The Commission will monitor the implementation and application of the agreement on citizens’ rights in the EU, and an independent national authority will undertake a similar role in the UK. Furthermore, the agreement on citizens’ rights will be enforced by both the UK courts/tribunals and the Court of Justice of the EU.
Next steps in the Brexit process
The European Council endorsed the Joint Report on 15 December 2017 and authorised the second phase of the Brexit negotiations to begin. It adopted new negotiating guidelines relating to a possible transition period, and the framework for the future relationship between the UK and the EU (“December Guidelines”). The Commission will now prepare its draft negotiating mandate, which will flesh out the details on the EU’s negotiating strategy. The Council will then need to approve the mandate before the Commission can commence the second phase of the negotiations with the UK.
Over the past year there has been a significant amount of competition enforcement in the consumer sector and we expect to see more enforcement action in 2018.
On 10 May 2017, the European Commission published its long awaited final report on its e-commerce sector inquiry. The final report appears to confirm the Commission’s concerns. Practices highlighted by the report as potentially problematic included exclusion of pure online players and the use of pricing software to monitor and adjust pricing.
As expected, the e-commerce sector inquiry was followed by enforcement action by the Commission. In June 2017, the Commission announced that it opened formal investigations into distribution practices of clothing company Guess for allegedly restricting retailers from selling cross-border to consumers within the Single Market. Furthermore, the Commission opened formal proceedings in three separate investigations into the licensing and distribution practices of each of Nike, Sanrio and Universal Studios. These companies license the rights for some of the world’s most well-known brands. Among other brands, sports apparel manufacturer Nike is the licensor of rights for Fútbol Club Barcelona’s merchandise, Sanrio is the licensor of rights for “Hello Kitty” and Universal Studios is the licensor of rights for “Minions” and “Despicable Me”. The Commission is investigating whether the three companies, in their role as licensors of rights for merchandising products, may have breached competition law by restricting their licensees’ ability to sell licensed merchandise cross-border and online. We expect there to be more investigations relating to restrictions on retailers from selling online and cross-border in the coming year.
In December 2017, the European Court of Justice handed down its judgment on a reference from a German court on prohibiting authorised retailers in a selective distribution network from selling luxury goods on third-party platforms. The ECJ considered that a contractual clause which prohibits authorised distributors within a selective distribution network from using online marketplaces is not precluded by EU law provided that: the clause has the objective of preserving the luxury image of the goods in question; it is laid down uniformly and not applied in a discriminatory fashion; and it is proportionate in the light of the objective pursued. Please see Aysha Fernandes’ (Legal Director Competition, EU and Trade Eversheds Sutherland) briefing and video interview with BBC on the case.
The Higher Regional Court of Düsseldorf in Germany took a different view when assessing the restrictions in sport shoe maker, Asics’ distribution agreements. The Court found that Asics’ distribution system, which prevented sales of its shoes via eBay, Amazon and price comparison websites, infringed competition law. The ban could not be justified by protecting the company’s brand or ensuring customers are advised when making purchases. It will be interesting to see whether the German courts take a different approach to such practices following the ECJ’s Coty judgment.
In the UK, the Competition and Markets Authority (CMA) fined Ping Europe Limited £1.45 million for operating an online sales ban in breach of competition law. The CMA found that Ping prevented two UK retailers from selling Ping golf clubs on their websites. Although Ping was pursuing a genuine commercial aim of promoting in-store custom fitting, the CMA found that Ping could have achieved this through less restrictive means. The CMA also fined the National Lighting Company £2.7 million for imposing a minimum price on online sellers in breach of competition law. The CMA reissued its open letter to remind all suppliers and retailers what resale price maintenance (RPM) practices look like, and what to do if they are or may have been involved in RPM or similar practices. The open letter gives details of different kinds of RPM that can break the law, including the use of minimum internet advertised price policies. It also warns that both suppliers and retailers can be fined for engaging in RPM. The CMA’s letter points out that the internet is an increasingly important channel for competition because it opens up markets, provides customers with more choice and enhances price competition.
In September 2017, the CMA completed its study into digital comparison tools (DCTs). It found a mostly positive picture of people’s use of and attitudes to DCTs, and the ways DCTs treat people. The CMA accepted that DCTs aim to help consumers by bringing together a number of products or services, offering a variety of ways to help them choose between options and make purchases or change providers. The CMA, however, raised some concerns, especially in relation to the transparency, accessibility and clarity about the issue of personal information by DCTs. As a result, the CMA recommended that all sites should be Clear, Accurate, Responsible and Easy to use (CARE). Also, all sites should be clear about how they make money, how many deals they are displaying and how they are ordering the results, as well as how they protect personal information and how people can control its use. Finally, the CMA recommended that all sites make it as easy as possible for people to make effective comparisons or use different sites, for example, through better information about products.
In 2017, we saw the CMA close its investigation on the application of competition law to pricing practises in the hotel online booking sector, as it no longer considered this to be a priority. The announcement followed the publication of a Report by the European Competition Network on the results of its monitoring exercise in the hotel online booking sector (in which the CMA took part) to examine how changes to room pricing terms, and other recent developments, have affected the market. The CMA published guidance which explains how hotels can set their prices on online travel agents.
In June 2017, the Commission fined Google €2.42 billion for abusing its dominant position in breach of Article 102 of the Treaty on the Functioning of the European Union (TFEU). The Commission found that Google abused its market dominance as a search engine by giving an illegal advantage to another Google product, its comparison shopping service. Google is appealing this decision. There are also other ongoing competition investigations against Google.
Finally, the ECJ set aside the General Court’s judgment against Intel Corp and refereed the case back to the General Court. This is an important case on rebates and the test to be applied to determine whether a rebate scheme is capable of having foreclosure effects on as efficient competitors. The General Court’s judgment is expected in 2018.
Employment law will continue to have an impact on businesses within the consumer sector, and we’ve highlighted below some of the top issues that should be on your radar for 2018:
1. Tax changes will affect termination payments – from April 2018, the difference in the tax treatment of contractual and non-contractual payments in lieu of notice will be removed. As a result, any unworked periods of notice will be taxable and the practice of applying the £30,000 tax exemption to non-contractual payments will end. (NIC changes will follow in 2019).
Action: Plan ahead to accommodate the new PILON tax calculation and additional tax costs. NB also the potential short term effect of managing employee tax expectations on termination and on negotiating position for settlement discussions.
2. Are Data Protection policies and procedures adequate? – employers will need to ensure appropriate practices and procedures are in place and that these extend to payroll and benefits providers to whom they outsource data, if high financial penalties are to be avoided.
Action: Think carefully about what personal data is retained, why, how the organisation will ensure transparency of approach going forwards and who will oversee this – see our HR “top 10” guide to GDPR .
3. Watch out for further legal clarifications regarding worker status – various court decisions have started to clarify areas of legal uncertainty over employment status and workers’ rights, frequently extending access to the latter. More decisions will follow in 2018 and legislative change may also result from the Taylor recommendations – read our briefing on the Taylor review .
Action: Review engagement of ‘self-employed’ staff, whether as freelancers, contractors or gig workers etc., to assess potential financial, legal or reputational risks should legal changes or further clarifications arise, as well as possible impact on the costs of hire and on flexibility.
4. Mental health at work: should you do more? – whilst the Government has pledged to strengthen mental health protection in the workplace, high profile campaigns by the NHS, charities and others are encouraging employers to offer greater support. There are also legal and practical reasons for employers to want to reduce the 1/3 of employee absence attributed to mental health issues, including anxiety stress and depression – read our briefing.
Action: Review absence levels and reasons to identify potential problem areas but also H&S and disability discrimination risks arising from mental health. Do policies and procedures need updating and are managers equipped to respond effectively when issues arise?
5. Are your organisation’s diversity and inclusion principles applied in practice? – following high profile news stories in 2017, increased confidence of workers to raise allegations of abuse of authority in the workplace looks set to continue to raise questions for HR and legal. This goes beyond sexual harassment, for example carrying out covert surveillance, reprisals against whistle-blowers, bullying behaviour and more.
Action: Review policies and management awareness of the issues and risks and consider additional training regarding the channels and mechanisms for addressing grievances or claims. Do employees know what kind of workplace behaviours could be considered harassment and how to report them? Is the organisation able to respond appropriately?
6. Think about how disability is identified and if you are doing enough – the UK courts have started to scrutinise how and when employers acquire knowledge of employee disability and how far they need to enquire if this is not disclosed or apparent. Employer responsibility in this area should be clarified in 2018.
Action: Watch out for further court clarification in early 2018 which may require re-appraisal of any standard practices and policies or advice to managers about raising reasonable enquiries of potential disability issues and how to respond.
7. Check for minimum wage compliance –especially non-standard pay arrangements – NMW will continue to rise and increase wage costs but the risks of default are higher than ever, with greater HMRC enforcement. Even employers paying above minimum wage levels can find their pay arrangements inadvertently fall foul of the Regulations, especially if they operate annualised hours contracts, 4 weekly pay arrangements or simply require staff to wear specific items of clothing.
Action: Audit pay systems to ensure they remain compliant with the NMW Regulations.
8. Have appropriate reviews of gender pay gaps taken place? – employers with 250 or more employees must publish their relevant data by 4 April 2018, and media interest is likely to be high. But in this context also, note the increased risk that, for equal pay purposes, a court has found female workers can in future compare their pay with that of male workers based at a different location if the employer is the same.
Action: Ensure appropriate auditing of pay arrangements has been conducted to identify risk areas and, particularly with regards to reporting obligations, that pay differentials and potential exposure to adverse publicity are understood before publication so that information can be meaningfully presented.
9. Tribunal claims – our clients have noted a marked increase in ET claims since the abolition of ET fees last year. It is predicted that this will continue to rise particularly in relation to claims involving discrimination, unlawful deduction from wages, holiday pay and unfair dismissal.
Action: Ensure your managers and HR personnel are familiar with what to do if ACAS contact you in relation to Early Conciliation and are able to identify what Tribunal documentation looks like so it can be escalated to the right to team to deal with. It’s expected that some HR personnel may need refresher training on Tribunal protocol and procedures given the likely surge of claims in the coming year.
Following a number of high-profile prosecutions in the sector, it is clear that the Home Office’s Enforcement Teams are ramping up their efforts to tackle illegal working. We have recently seen an increased number of civil penalty notices being served on employers for illegal working given the significant reliance on migrant workers and high turnover of staff in the consumer sector. We saw clear evidence in 2017 of civil penalties issued to employers which are likely to have arisen solely from tax records, suggesting data sharing between the immigration and tax authorities is now more common and efficient than it has been previously.
The Home Office Enforcement teams are seeking to impose tougher penalties and sanctions not only on businesses but also on those individuals within the business responsible for preventing illegal working. Any penalties issued are published online which could cause significant brand damage, in addition to a fine of up to £20,000 per illegal worker and/or criminal sanctions. It is therefore essential that the correct right to work checks are undertaken before employment commences to ensure that all employees have the appropriate right to work in the UK. Employers who are Tier 2 sponsor licence holders also have an ongoing duty to ensure that any migrant workers continue to have the right to work throughout the employment relationship to avoid licence revocation. Therefore, we would recommend that all employers consider urgent reviews of their on-boarding practices and visa tracking processes to prepare in good time for formal immigration audits.
2017 was a busy time in the corporate governance sphere with many institutions and government bodies undertaking a review of the existing UK regime. A report from the Business, Energy & Industrial Strategy Committee (BEIS) prompted a response from the Government at the end of August 2017 with the promise of new legislation in the summer of 2018.
The Government’s response focused on three key areas of the BEIS’ proposals:
- a code for large private entities
- strengthening employee representation and stakeholder engagement
- executive pay
The Government’s proposed measures will require a combination of changes to the Corporate Governance Code (for which the FRC is responsible), voluntary industry action and secondary legislation.
Code for large private companies
The most radical change proposed is for a new corporate governance code for large private companies. The Government has accepted there is a need for the corporate governance framework for the UK’s largest private companies to be strengthened. They believe that the conduct and governance of large companies, whatever their legal status, has a sizeable impact on the interests of employees, suppliers, customers and others. This will have a significant impact on UK private consumer businesses who typically have a large number of employees, so many will be required to comply in the areas detailed below.
Whilst it is understood that the application of a lot of these principles will be voluntary, the Government also announced that they will introduce secondary legislation to require all companies of a “significant” size (2000+ employees) to disclose their corporate governance arrangements in their Directors’ Report and on their website, including whether they follow any formal code.
The Government also stated that a formal reporting requirement in respect of section 172 will drive directors to think more carefully about how they are taking account of the wider stakeholders’ interests. It was suggested that the reporting requirement is likely to be imposed on businesses with 1,000 employees or more.
Strengthening representation and engagement
The Government’s response to the BEIS report has been criticised, for example by trade unions, for not being as far reaching as the BEIS proposals. In their response the Government has suggested creating a specific provision in the UK Corporate Governance Code which requires premium listed companies to adopt, on a “comply or explain” basis, one of three employee engagement mechanisms:
- a designated non-executive director
- a formal employee advisory council
- a director from the workforce
The Government is not convinced that long term incentive plans should be abolished but does agree that companies should avoid conforming rigidly to a standard model and should consider adopting other structures which may be more appropriate. Secondary legislation will be introduced in 2018 requiring quoted companies to report annually the ratio of CEO pay to the average pay of their UK workforce, together with a narrative explaining changes in the ratio from year to year and setting the ratio in the context of pay and conditions across the wider workforce.
The Investment Association will be asked to develop and maintain a public register of listed companies encountering a 20%+ shareholder vote against pay awards to executives, along with a record of what these companies say they are doing to address shareholder concerns.