For companies with a year-end of 31 December, the new remuneration reporting requirements for directors of UK-incorporated listed companies will start to kick in from 1 January 2014.
The new regime has two main components:
- A directors’ remuneration policy, subject to a binding shareholder vote at least every three years.
- An expanded annual report on remuneration, subject to an annual advisory vote of shareholders.
Payments made under directors’ contracts entered into or modified from 27 June 2012 onwards will need to be consistent with the new policy or else separately approved by shareholders’ resolution.
Directors’ remuneration policy
The requirements for the contents of these policies are set out in considerable detail in the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. These new requirements apply only to UK-incorporated listed companies. They do not apply to companies with shares admitted to AIM or to non-UK incorporated companies.
The key components of this forward-looking policy, to be included in the directors’ remuneration report, are as follows:
- An explanatory table, with detailed notes, setting out the company’s approach to directors’ remuneration in the period covered by the policy. This must be supplemented with a bar chart showing illustrative scenarios.
- A section on the company’s approach to remuneration for new directors recruited to the board.
- Details of the company’s policy on payments for loss of office.
- An explanation of the extent to which the company has taken into account employees’ and shareholders’ views.
For companies with a December year end, the first new-style reports, and binding vote on their directors’ remuneration policy, will be put to shareholders at their 2014 AGM. The final date for receiving shareholder approval will be the end of December 2014.
Companies cannot change their directors' remuneration policy without further shareholder approval, either at a subsequent AGM or a specially convened general meeting. Companies will need to ensure that a balance is struck between including sufficient detail to satisfy shareholders and allowing sufficient flexibility to ensure that the policy is workable in practice.
Annual report on remuneration
In addition to putting together a directors’ remuneration policy, listed companies face more detailed requirements for their annual report on remuneration, which is subject to an annual advisory vote. This report sets out how the remuneration policy was implemented in the previous financial year.
One new requirement is the obligation to include a single total figure for the remuneration of each director. The aim is to provide comprehensive disclosure on all types of remuneration, including fixed and variable elements as well as pension provision, in a consistent format.
There is also a focus on including a breakdown of payments for loss of office. Any such payment, in addition to being included in the annual report, will also need to be published on the company’s website “as soon as practicable” after the payment has been agreed. These details will need to be kept available until the next annual report is published.
The Financial Conduct Authority has recently published changes to the Listing Rules, following its consultation in the summer. As a result the considerable overlap between the directors’ remuneration disclosure requirements prescribed by law and those in the Listing Rules has now been largely removed. Listed companies will also need to take account of the GC100 Investor Group Guidance and the requirements of institutional investors.
In addition, the Financial Reporting Council is currently consulting on whether the UK Corporate Governance Code should be amended to address a number of issues relating to executive remuneration. Any changes are likely to take effect for accounting periods beginning from 1 October 2014 onwards.