During the past year we outlined some of the changes proposed by the Government in relation to directors' remuneration.
Those proposals have now come to fruition with the Enterprise and Regulatory Reform Act 2013.
The Act introduces a new legal framework for remunerating directors of quoted companies and, for the first time, attempts to establish statutory based link between pay and performance by giving shareholders a say in remuneration policies.
The new legislation amends Companies Act 2006 provisions and introduces the following key changes for 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 on NASDAQ (this does not include AIM listed companies):
- The remuneration report must include a forward-looking remuneration policy which must be approved by an ordinary resolution of its shareholders every three years
- Remuneration or loss of office payments to current, future or former directors, may only be made if they are consistent with the most recent remuneration policy approved by the company's shareholders
- Payments which are not in accordance with the remuneration policy or which have not been separately approved by the shareholders will be held by the recipient on trust for, and be recoverable by, the company and any directors who authorised the payment will be jointly and severally liable to indemnify the company for any resulting loss
- A court may relieve directors of that liability if the directors can show that they acted honestly and reasonably.
The changes are expected to take effect from 1 October 2013 and will coincide with further amendments to regulations containing detailed content requirements for directors' remuneration reports. Those new regulations are expected to be laid before Parliament during this Spring.
Why was this necessary?
Directors' pay has been a hot topic in the wake of the financial crisis which engulfed the UK and Europe in recent years.
With the economy stagnating and tough decisions on public spending cuts coming to a head, there has been a growing sense of unease about the distribution of rewards across society - particularly in banks and large corporates.
News reports of disproportionately large bonuses and other types of remuneration for directors in underperforming organisations were common, with many across society questioning whether such directors deserve their rewards, given the state of the economy.
In light of this, the Government has maintained its stance following the initial consultation in January last year by introducing these new provisions. Shareholders will have more powers to block excessive pay packages and directors will have to justify high salaries.
The first companies required to comply with the new regime will be those whose financial year begins on or after 1 October 2013. This will typically see the first new style remuneration reports being put forward, and approval for the forward looking remuneration policies being sought, at AGMs in the Spring of 2014.
All quoted companies must have successfully sought approval for their remuneration policy by no later than the start of the second financial year to begin after the reforms come into force.
So, for companies whose financial year commences 1 October, shareholder approval of the remuneration policy must be obtained by 1 October 2014 and, unless the payments are required to be made as part of obligations which the company entered into before 27 June 2012, remuneration paid or loss of office payments made after 1 October 2014 will need to be consistent with that approved policy.