1. Introduction 

2. Compliance

3. Voting

4. Directors' remuneration

5. Next steps

1. Introduction 

The Government has published its much awaited research paper on how companies and shareholders have responded to the new reporting and governance requirements for directors' remuneration. The requirements were introduced in the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (“the Regulations”) and all UK companies who were quoted when the Regulations came into force have now produced their first remuneration report under the new regime. 

The paper examines the level of compliance with the Regulations amongst a sample of UK incorporated companies listed on the London Stock Exchange, examining 38 companies with more than 20,000 employees, 38 companies with fewer than 20,000 employees and 17 companies with fewer than 250 employees and which have turnover of less than €50m per annum or which have less than €43m in assets. 

2. Compliance 

The paper: 

  • examines and assesses a number of questions on a “Pass/Fail” basis as to whether the required information was provided as set out in the Regulations; and
  • makes a qualitative assessment of compliance with the requirements to provide an explanation of how workforce pay is taken into consideration when setting executive pay; to have an appropriate group of employees to calculate the relationship between average employee pay and executive pay; and to include a statement of consideration of shareholder views. 

In assessing compliance with the Regulations, the research considered relevant aspects of the GC100 and Investor Group Directors’ Remuneration Reporting Guidance. 

Disclosure in relation to 19 questions was assessed and the paper notes full compliance on 8 of these with a very high level compliance on another 7. Unsurprisingly, the larger companies had much better compliance levels than the smaller companies (possibly a function of having more resources to utilise). 

Whilst most companies complied with the majority of the requirements in the Regulations that were examined, certain disclosures (covering requirements to provide details of pension entitlements, information on payments to past directors, information on payments for loss of office, and future salary policy) evidenced more notable levels of non-compliance. 

The paper specifically notes a significant level of non-compliance with the requirement to specify clearly, in monetary terms or otherwise, the maximum future salary that may be paid under the remuneration policy. Whilst the December 2014 GC100 and Investor Group supplemental guidance states that the Regulations clearly set an expectation that a maximum level of remuneration should be disclosed for each executive director, including the maximum possible level of bonus, this provision was perhaps the most debated of all the provisions of the Regulations with no clear guidance at the time that companies were drafting their first policies as to what was expected in this regard. 

The paper highlights three specific areas where there is scope for greater clarity, namely, in relation to the consideration of workforce pay when setting director’s remuneration policies (although there is emerging evidence of good practice in this respect); in relation to considering shareholder views when setting remuneration policy; and in comparing changes in CEO pay with those of employees generally. 

3. Voting 

The paper highlights voting results for remuneration policy and remuneration report votes from the 2014 AGM season, in the context of the four previous years’ votes, with a particular focus on turnout and dissent levels. There has been an increase in shareholder voting numbers at smaller companies, whilst dissent has steadily increased (though peaking in 2012). Early evidence from the first round of policy votes shows marginally higher levels of dissent for binding votes on remuneration policies than for advisory votes on implementation reports. It also suggests that shareholders are more likely to vote against remuneration policies than to abstain compared with votes on remuneration reports. This suggests that the introduction of the binding vote has not discouraged dissent, as some commentators feared. 

4. Directors' remuneration 

Finally, the paper includes an analysis of recent developments in directors’ remuneration more generally, concluding that the increase in total pay for directors has slowed, especially in the last two years. For example, total remuneration awarded to FTSE 100 CEOs has fallen significantly in 2012 and 2013. Salary increases are slowing more aggressively at larger companies than smaller ones (though the absolute amounts concerned are much greater at larger companies). In terms of maximum bonus and long term incentive opportunity available, generally a greater percentage of salary is available to those at larger companies. Similarly, in terms of actual bonus realised or expected value of long term incentive options, the higher percentages are also to be found at larger companies, though these too are reducing. 

5. Next Steps 

The research paper was prepared by Manifest and recommends that the GC100 and Investor Group should adjust the Directors’ Remuneration Reporting Guidance to clarify some of the areas that may have led to confusion. 

Manifest specifically notes in the paper that "judgements and opinions presented in this paper are those of Manifest, and do not necessarily reflect the Government’s position". It will therefore be interesting to see how much reference Vince Cable makes to it at a summit taking place on 19 March to establish the next steps for improving corporate culture as he has announced that he will be taking "the opportunity to outline the work that has been done in the areas of audit, short-termism, executive pay reforms and business human rights".