ESRS S1-16 CEO Pay Ratio

What ESRS S1-16 requires

ESRS S1-16 requires disclosure of: the annual total compensation ratio of the highest-paid individual to the median annual total compensation of all employees (excluding the highest-paid individual).

Annual total compensation: All forms of pay and benefits received during the year — base salary; cash bonuses earned for the year (not necessarily paid in the year); the value of long-term incentive awards vesting during the year (shares, options, performance share units); pension contributions; company car and other benefits in kind; and any other taxable compensation. The definition must be consistent for both the CEO and the median employee.

Highest-paid individual: Typically the CEO, but must be the actual highest-paid individual in the organisation — which may be a different executive role (investment bankers, fund managers, or specialist executives sometimes earn more than the CEO). Disclose the role of the highest-paid individual without necessarily naming them if local law permits anonymity.

Median employee: The median of all employees' annual total compensation — the midpoint figure where half of employees earn more and half earn less. For global companies, median is calculated across the whole employee population. Currency conversion at a consistent rate is required for multinational companies — typically year-end or average exchange rates applied consistently.

Year-on-year trend: Disclose the ratio for the current year and the prior year minimum. Significant year-on-year changes (due to CEO change, one-off long-term incentive vesting, or median wage increases) should be explained.

Calculating the CEO pay ratio — methodology decisions

The CEO pay ratio calculation involves several methodology decisions that significantly affect the reported figure — and must be consistently documented and applied year-on-year.

Total compensation scope: Decide which compensation elements to include. Vesting long-term incentives (shares, options) can swing the ratio dramatically in years with large LTI vesting events. Base salary only ratios are much lower and more stable. ESRS S1-16 requires 'total annual compensation' — the broadest measure. For transparency, consider disclosing both a base salary ratio and a total compensation ratio with explanation of the components.

Median calculation for global workforce: For a company with employees in 30 countries in different currencies, median calculation requires: converting all compensation to a single currency (typically EUR or USD using year-end rate); ranking all employees by total annual compensation; identifying the median (middle) employee. This requires complete payroll data for all employees globally — which many companies do not have in a single system.

Exclusions and inclusions: Some companies exclude part-time employees or employees in certain countries from the median calculation — typically to simplify data collection. ESRS S1-16 does not mandate exclusions, but where they are made, disclose them clearly with the rationale. Exclusions that systematically remove lower-paid workers inflate the median and understate the ratio.

Bonus year vs payment year: Long-term incentives are particularly complex — they may be awarded in one year, vest (become owned) in a later year, and be received in cash or shares. Align the accounting for bonus and LTI in the CEO calculation with the same basis for median employee bonuses to ensure comparability.

Contextualising and communicating the CEO pay ratio

CEO pay ratios vary enormously between sectors and company sizes — without context, the ratio number tells an incomplete story.

Typical ranges: Large European listed companies typically report CEO pay ratios of 50:1 to 200:1 on a total compensation basis. Financial services, technology, and consumer goods companies with high-performing executives often have higher ratios (200:1 to 500:1 in exceptional years). Industrial and infrastructure companies with lower variable pay typically show 30:1 to 80:1.

Sector and structure context: A company with a large proportion of lower-wage production workers will show a higher ratio than a professional services firm where most employees are highly paid — regardless of CEO pay level. Contextualise your ratio by disclosing the proportion of employees in each pay band and the industries or countries where lower-paid workers are concentrated.

Year-on-year variation: Large LTI vesting events can cause the ratio to spike dramatically in a single year — explain one-off factors. Conversely, a year without LTI vesting may show an unusually low ratio. Present a 3-year trend where possible to smooth out one-off fluctuations.

Proxy adviser scrutiny: ISS and Glass Lewis track CEO pay ratios and use them as inputs to voting recommendations on executive remuneration. Ratios that significantly exceed sector peers without clear performance justification attract negative voting recommendations. Monitor peer benchmarking of your ratio annually.

Frequently asked questions