Since our last newsletter we have had more details of the proposed reforms in this area. This process started in January when the Business Secretary Vince Cable announced a package of measures to address perceived failings in the corporate governance framework for executive remuneration. This was followed in March by a consultation paper with details on one of those measures - enhanced voting rights for shareholders (click here to see our April newsletter article which detailed the consultation proposals). In June these proposals were set out in detail and will form part of the Enterprise and Regulatory Reform Bill currently going through Parliament. They include:
- A binding vote on the company's pay policy, requiring a majority shareholder vote. The binding vote will be annual unless companies choose to leave their remuneration policy unchanged, in which case it will be compulsory at least every three years.
- An annual advisory vote on the implementation report on pay policy in the previous year; if a company fails the advisory vote it will be required to put its pay policy back to shareholders in a binding vote the following year.
- Companies will not be able to make payments outside the scope of the approved pay policy. A change of pay policy will have to be put to shareholders for re-approval.
- The pay policy must include details such as how pay supports the strategic objectives of the company, performance measures and strategy on exit payments.
- The approach to exit payments will form part of the company's pay policy and so will also be subject to the binding vote. Companies will not be able to pay leaving directors more than shareholders have agreed. When a director leaves, the company will have to publish (promptly) a statement of payments the director has received.
- The implementation report will have to show a single figure for the total pay directors received for the year, to cover all fixed and variable rewards received as well as pension provision, and companies will also have to report details of whether performance measures were met.
The aim is for these changes to be effective from October 2013.
A couple of the corporate governance measures suggested earlier in the year - to limit conflicts of interest in remuneration committees and to require quoted companies to adopt incentive clawback provisions - do not feature in the current proposals but will be taken forward in a separate exercise by the Financial Reporting Council through amendments to the corporate governance Code.
In late June, the government issued a consultation paper on revised remuneration reporting requirements, together with draft regulations which set out the proposed form and content of the directors’ remuneration report. These regulations will apply to all quoted companies and will replace the existing requirements.
The government proposes that remuneration reports be split into two parts. The first part will constitute a policy report which, as noted above, will generally be subject to a binding vote every three years, unless the pay policy changes. This will set out:
- key elements of director pay in table form
- information about any contractual provisions in service contracts relating to remuneration
- a graph setting out how much pay directors may receive for below, on target and maximum performance
- information about percentage change in profits, dividends and overall spend on pay
- a general framework setting out the company's approach to termination payments, including how each element of pay will be dealt with, whether different types of leaver will be treated in different ways and how performance will be taken into account
- how employee pay and shareholder views have been taken into account in setting pay policy.
This part of the report will only be required when there is to be a shareholder vote on policy.
The second part of the report will outline how the pay policy has been implemented in the previous year and will be subject to an annual advisory vote. In addition to the single remuneration figure for each director, the implementation report will have to include:
- details of any exit payments made
- details on variable pay awarded in the reporting year
- details of total pension entitlements
- details of performance against metrics for long term incentives.
- a chart comparing CEO pay with company performance, with the aim of giving shareholders an impression of how pay and performance compare
This report will also need to set out the directors’ total shareholdings, details of remuneration consultants who have provided advice and details of how shareholders voted on both the previous year’s binding vote (if applicable) and the advisory vote.
The Financial Reporting Council's Financial Reporting Lab has recently produced a report on investors' views on how a single figure for a director's total remuneration should be calculated. Details are available here.
As noted above, the regulations are expected to come into effect from October 2013 at the same time as the Enterprise and Regulatory Reform Bill is intended to come into effect.
The consultation closes on 26 September 2012. Click here to see the BIS press release on the remuneration reporting regulations and to download the consultation paper.