Executive remuneration remains a hot topic and changes to the directors' remuneration report of a quoted company are scheduled to come into force for financial years beginning on or after 1 October 2013. This article looks at the recent BIS FAQs designed to help stakeholders understand how the changes will affect them. We also look at the revised draft of the regulations which will implement the reforms and the work of the Financial Reporting Lab in shaping them. We also consider briefly the recent NAPF letter to the Chairmen of the remuneration committees of FTSE 350 companies.

For financial years beginning on or after 1 October 2013 the directors' remuneration report for a quoted company will need to consist of:

  • a statement by the chair of the remuneration committee,
  • the company's policy on directors' remuneration (remuneration policy), and
  • information on how the remuneration policy was implemented in the relevant financial year (implementation report).

A quoted company for these purposes means a company registered in the UK and with equity listed on the main market in London (but not AIM), officially listed in an EEA State or admitted to dealing on the New York Stock Exchange or Nasdaq.

The remuneration policy must set out the company's approach to every element of directors' remuneration, including recruitment and loss of office payments. Shareholders will have a binding vote on a resolution to approve the directors' remuneration policy and companies will have to seek shareholder approval at least every three years, or more frequently if a company wishes to change the policy. Once its remuneration policy is approved, a company will only be permitted to make payments permitted by the policy unless it seeks separate shareholder approval for a payment.

The implementation report will set out how the remuneration policy has been implemented in the relevant financial year, including a requirement to include a single figure for the total pay received by a director in that year. Shareholders will have an annual advisory vote on a resolution to approve the implementation report. If the advisory vote on the implementation report is not approved in a year when the remuneration policy has not been put to a binding vote, the company must seek shareholder approval for its remuneration policy in the following financial year.

A statement will have to be published as soon as possible if a director leaves office, setting out payments the director has received or will receive in the future.

The devil, of course, is in the detail but as yet neither the primary legislation (The Enterprise and Regulatory Reform Bill) nor the secondary legislation (the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2012) (Directors' Remuneration Regulations) to implement these changes have been finalised. There have, however, been some recent developments aimed at progressing and informing understanding of the changes to come.

BIS FAQs on directors' remuneration reforms

The Department of Business Innovation & Skills recently published a set of Frequently Asked Questions designed to help stakeholders understand how and when they will be affected by the reforms. The FAQs provide a helpful guide to what the changes will mean in practice and cover the following areas:

  • the scope of the new framework
  • by when companies need to comply with the new regime
  • more detail on the voting procedures described briefly above
  • remuneration reports – what should go in them and when
  • the restrictions on remuneration payments
  • the restrictions on loss of office payments
  • the impact on existing contracts and other legal arrangements
  • what happens if unauthorised payments are made.

Until the legislation is approved by Parliament the details of the reforms may change. If further changes are made, BIS will, if necessary, update the FAQs to reflect the final text of the legislation.

Revised draft Remuneration Regulations published

In March BIS published a second draft of the Directors' Remuneration Regulations for consultation. The two week consultation closed on 25 March. The revised draft reflects comments received by BIS since the first draft of the Regulations was published in June 2012. We reported on the first draft of the Regulations in our July newsletter, click here to read the article.

There are a number of technical changes in the revised draft – moving the requirements for the disclosure of certain information from the remuneration policy to the implementation report and vice versa. Some other points to note are:

  • the requirement for a statement by the "chair of the remuneration committee" obviously assumes the existance of such a committee. There is, however, no legal requirement to have a remuneration committee and although most London listed companies do (reflecting the Corporate Governance Code), such a committee may not be required for UK companies listed overseas
  • if the remuneration policy is not being put to a vote the Directors' remuneration report must state when the remuneration policy was approved and where it can be found by shareholders, whether on the company's website or in some other place
  • more detail is given on the information required to be included in the statement by the chair of the Remuneration Committee. It needs to include "key messages" on remuneration, the context in which decisions have been made and major changes during the year. There is currently uncertainty as to what "key messages" includes and it has been suggested that this phrase should be deleted
  • the requirements to disclose scenario charts in remuneration policy which demonstrate how directors' pay varies with performance and a CEO and company performance graph in the implementation report have been amended in line with findings of the Financial Reporting Lab report in early March (see below)
  • changes have been made to the single figure remuneration table requirements – additional information can now be included and information relating to non-executive directors can be split out from information relating to executive directors
  • there is a new requirement to disclose in the remuneration policy how a company would agree a remuneration package for a new director, including the maximum salary that could be awarded
  • there is a new requirement to disclose in the implementation report payments made in the financial year to past directors.

It is intended that the final version of the Directors' Remuneration Regulations will be laid before Parliament in the Spring but this will not happen until after the Enterprise and Regulatory Reform Bill has received Royal Assent. Click here to see the Regulations. More clauses to the draft legislation are expected before it is enacted and we will report on these in due course.

Financial Reporting Lab report on 'Reporting of pay and performance

In early March the Financial Reporting Council (FRC) issued a Financial Reporting Lab (Lab) project report 'Reporting of Pay and performance'. The Lab was set up by the FRC to help improve the effectiveness of corporate reporting and gathers the views of investors and companies to come up with practical solutions to reporting issues. In the context of the Directors' Remuneration Regulations the Lab undertook its first project in Spring 2012 looking at the requirement for a single figure for remuneration which developed a methodology for measuring and presenting a single figure for remuneration which is a requirement of the implementation report under the draft Regulations.

BIS asked the Lab to undertake a second project on remuneration looking at two more aspects of the draft Regulations:

  • the need for a performance chart comparing CEO pay, based on the single figure for remuneration, with company performance measured using Total Shareholder Return (TSR) (to be included in the implementation report)
  • scenario charts to indicate how executive director pay might vary according to company performance (to be included in the remuneration policy).

These two areas were selected as a result of consultation responses.

The Lab's report 'Reporting of Pay and performance' recommended some revisions to these proposals. Although investors and companies agreed that there should be a requirement for information to be included to help investors assess the connection between CEO remuneration and company performance it was felt that, instead of requiring a new graph the current five year TSR graph should be retained with the addition of a simple table setting out historic levels of CEO pay with information on the amount of performance related pay shown against the maximum amount achievable. The report also suggests that a simplified version of the scenario charts suggested by BIS should be used. The report also follows up on some points of detail relating to the single figure for remuneration considered in the Lab's first report.

The 'Reporting of Pay and performance' report can be found here and the FRC's press release here.

NAPF letter to FTSE 350 remuneration committee Chairmen urging pay restraint

In early March, the National Association of Pension Funds (NAPF) published an open letter to FTSE 350 remuneration committee Chairmen with its thoughts on executive remuneration for 2013. The letter emphasises the position set out in the NAPF's Corporate Governance Policy and voting guidelines which were issued in December (see our article in our January/February newsletter for details) and makes the following specific points:

  • base pay increases should be capped at inflation with compelling reasons for divergence from this approach
  • performance conditions should be genuinely stretching and related to long-term growth
  • NAPF members will push back on peer group benchmarking of remuneration with boards expected to take a robust approach when faced with peer comparison
  • Remuneration committees should be prepared to take difficult decisions and show authority when negotiating pay and to use discretion when considering bonus payments and share awards vesting to ensure rewards are aligned with the success of the business and returns on capital.

The letter states that the NAPF expects to see continued shareholder opposition to remuneration policies at some companies at AGMs in 2013 where remuneration practices are not aligned with the interests of shareholders and that directors responsible for remuneration policy should, in these circumstances, expect to meet opposition to their re-election.

The letter also references the remuneration principles the NAPF recently issued jointly with Hermes EOS, BT Pension Scheme, RPMI Railpen Investments and USS Investment Management to guide their investee companies approach to executive remuneration. We reported on these principles in our last newsletter. The NAPF letter can be read here.