The final pieces of the Government's jigsaw of reforms on directors' pay have been slotted into place.
The provisions of the Enterprise and Regulatory Reform Act 2013, along with the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, came into force on 1 October 2013.
Quoted companies (essentially, companies registered in the UK with equity listed on the main market in the UK, in another state in the EEA, on the New York Stock Exchange or NASDAQ) will now need to seek shareholder approval for their remuneration policies and will be required to produce more detailed information on directors' pay in their remuneration reports. The new requirements do not apply to AIM listed companies.
Outline of directors' remuneration report
The Act and the Regulations provide that, for financial years ending on or after 30 September 2013, directors' remuneration reports will contain two distinct parts:
- a future remuneration policy, which will set out the company's remuneration and loss of office payment policy. This element will have to be approved by shareholders at least every three years
- a remuneration report, required annually, which will explain how the policy was implemented in the past financial year and set out payments made to directors. The shareholder vote on this element will be advisory, so will not directly affect directors' remuneration entitlements, but will send a clear signal to directors on the level of support for such payments
The new remuneration policy will require the company to set out a future policy table, describing each component of the directors' remuneration package and explaining how each such component supports the short and long-term strategic objectives of the company.
Detailed information on remuneration principles on appointment of new directors, illustrations of how the remuneration policy will apply, and the policy on loss of office payments will also need to be included.
Once approved by shareholders, the company will only be able to make remuneration payments or payments for loss of office which are in accordance with the policy. Payments outside the policy will require separate shareholder approval, failing which, the payment will be deemed to be held on trust for the company, and each director who authorised the payment will be liable to indemnify the company for any resulting loss.
Designed to make directors' pay clearer and more easily understood, the new Regulations include provisions requiring the remuneration report to include a single figure for total remuneration paid to each director and a breakdown showing salary and fees, all taxable benefits, annual bonuses, long-term incentive awards and pension related benefits.
To enable investors to consider those payments in the context of the company's performance the remuneration report must also include a chart showing the relative importance of the company's spend on pay, providing details such as overall staff costs and payments made to shareholders.
To assist companies and their investors, the GC100, alongside leading UK institutional investors, has published guidance on best practice in implementing the new reporting requirements.
It aims to encourage a move away from boilerplate language towards innovation in reporting, encouraging companies to make tailored, meaningful disclosures and policies.
Making the changes
Quoted companies will need to make their preparations now for implementation of the new reporting requirements, in particular:
- establish when the new requirements will apply for the new style remuneration report and for the submission and approval of the remuneration policy
- identify the additional disclosures which will need to be included in remuneration reports
- review existing service contracts with directors to ensure that the remuneration policy is drafted widely enough to cover existing commitments and start to engage with key investors