The CSRD has required subject companies to implement new management indicators on social, environmental, or business conduct topics.

Among these indicators, the pay ratio¹ proved to be one of the most complex to grasp for the social component.

While large listed companies had already been publishing an equity ratio for several years, the publication of this new indicator raised a number of questions regarding the differences in construction as well as interpretation that could be made of these two indicators.

Some studies indicate that over 80% of Wave 1 companies published the pay ratio for their first sustainability statement. However, the methodological difficulties related to the construction of this indicator, as well as the challenges in establishing it across the entire scope required by the CSRD, have been widely highlighted.

The pay ratio requires considering, for the entire consolidated group, all fixed and variable remuneration for full-time and part-time employees, and identifying both the individual with the highest remuneration and the median remuneration amount for the rest of the individuals. The ratio between the highest-paid individual and the median of the remaining individuals must then be calculated.

Among the difficulties encountered by large international companies, non-homogeneous remuneration structures in subsidiaries, different management systems, or unequal remuneration levels depending on the countries or economic activities of these companies are regularly cited reasons for the challenges in developing this indicator.

This complexity has often led companies to publish an indicator on a partial basis, making inter-company comparison imperfect.

Since the interpretation that could be made did not reflect the uniqueness of local activities and policies, some companies used the option offered by the ESRS to publish an adjusted pay ratio that takes into account the purchasing power of different countries.

This transparency exercise for listed companies subject to the CSRD in the first wave also raised questions regarding the comparability of this ratio and the equity ratio published in the corporate governance report section.

The equity ratio is an obligation linked to the PACTE law, which requires listed companies to measure the gaps between the remuneration of executive officers and the average and median remuneration of employees, and to compare them with the company's performance evolution.
Calculated solely within the scope of the listed company or on a broader scope, which is often France², its objective is to enhance transparency regarding executive remuneration compared to that of employees and its consistency with the company's performance.

Calculated on different scopes with varying remuneration bases, the comparability of the indicators is challenging.

Linked to the company's performance, the equity ratio reveals consistency with the company's value creation and helps detect excessive remuneration.³ or lack of attractiveness in the market.

The compensation ratio performance helps to understand the quality of social dialogue and pay equity and to reveal the reality of internal disparities.

Connecting these two ratios is essential for guiding HR strategy, governance, and communication. Aligning them is crucial to deliver a comprehensive message internally and externally.

The European directive on pay transparency⁴ will require companies with more than 100 employees to measure and publish pay gaps. This will be an additional component to consider for enhancing the company's attractiveness.

Given these complexities, Nexia S&A's Sustainability and Legal teams can assist you in understanding these regulatory frameworks, ensuring compliance, and, most importantly, identifying ways to strengthen their coherence and address underlying risks related to governance, internal cohesion, and reputation.

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^{1: ESRSS1-16 Ratio between the total annual compensation of the highest-paid individual in the company and the total annual compensation median of all other employees
2: The AFEP-MEDEF Code recommends that holding companies define a scope covering 80% of the workforce in France or companies under exclusive control (Art. L.233-16)
3: Proxinvest considers that beyond 100 times (compared to the average), the ratio becomes socially problematic.
4: Transparency Directive 2023/970}

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