Despite the recent successes for shareholders in executive pay disputes, the Department for Business, Innovation & Skills has published draft legislation aimed at providing greater control over director remuneration in listed companies. The proposed legislation will only apply to main board directors at UK-incorporated companies which are listed on the Official List (excluding AIM,) and will only apply after October 2013.

Current position

Presently, the annual directors' remuneration report which listed companies must prepare to comply with regulations are only subject to an advisory (non-binding) shareholder vote. Once the proposed new legislation comes into force, a remuneration report will be separated into two distinct parts:

  • A policy report which will be subject to a periodic binding vote
  • An implementation report which will be subject to an annual advisory vote  

It is the view of the Secretary of State that too many reports are currently an unintelligible mix of the two and that they are overly dense and contain too much data which is difficult to interpret. The key change will be for these reports to contain more meaningful information to allow shareholders to make more informed judgements.

Policy report

The policy report will detail the proposed future policy for executive pay in forthcoming financial years. It will need to be adopted by way of an ordinary resolution and must be proposed at least every three years. Once the policy report has been approved, the company can only make payments in compliance with the policy, unless shareholders adopt a revised policy or agree to something different by special resolution. In addition to providing general detail on remuneration and why the remuneration committee has used specific benchmarks in setting pay, the policy report must also:

  • Provide a table setting out the key elements of pay and supporting information (including employee share scheme and pensions information), including how each element supports the achievement of the company’s strategy, the potential value and performance metrics
  • Provide information on service contracts
  • Provide scenarios for what directors will get paid for performance that is above, on and below target (including detail of whether remuneration is subject to any clawback arrangement)
  • Provide information on the percentage change in profit, dividends and the overall spend on pay
  • Set out the principles on which exit payments will be made
  • Give details of any material factors that have been taken into account when setting the pay policy, specifically employee and shareholder views.  

Implementation report

The implementation report must be produced each year and will need to be proposed as an ordinary resolution. The report will explain how the policy has been implemented in the preceding financial year. Amongst other things, this section of the report must include:

  • A single figure for total pay for each director explaining how pay awards relate to the company’s performance
  • A distribution statement, outlining how executive pay compares with other dispersals (eg, dividends, business investment, tax and general employment costs)
  • More detailed information about the performance conditions for annual bonuses and how the company has dealt with termination payments as compared with company policy
  • Details on how shareholders voted on policy and implementation reports at the previous general meetings, the percentage of abstentions, known reasons for significant dissent and any action taken by the remuneration committee in response  


Where payments are found to have been made in breach of the legislation, they may be recoverable from the receiving director and from the directors who authorised those payments. However, certain payments made under agreements dated before 27 June 2012 (unless the agreement was amended after that date) will not be caught by these requirements, even if they are inconsistent with current policy.  

Next steps

As all relevant companies will have to put forward a resolution in the first year of the new legislation coming into effect, they should soon start considering the new legislation and proposals and, in particular, review how best to report and draw up a policy in a way that complies with this legislation. Although the new legislation will not apply to non-UK incorporated companies listed on the Official List, such companies (as well as AIM listed companies) may also want to consider the new legislation, as these companies may themselves come under pressure from their shareholders to adopt similar standards and approval processes.