The Government has made a further announcement on strengthening shareholders’ rights to control executive remuneration.
As expected, there will normally be annual binding votes on the forward-looking policy on executive directors’ remuneration. The new twist is that companies will not need to hold a vote if their policy remains unchanged from the previous year (subject to the need to hold a vote at least once every three years). This still leaves open the question of how much flexibility shareholders will allow companies to retain within the published policy and a dialogue between companies and their shareholders will be needed to resolve that issue. Companies will be bound by the policies approved by shareholders and will therefore need to draft these policies very carefully in order to retain some flexibility while giving shareholders reassurance that the proposed level of flexibility will not be abused.
The attempt to set a limit on the level of exit payments that can be made to directors without a specific shareholder vote has been abandoned. This has been replaced by rolling this issue into the binding vote on the forward-looking policy statement. Improved and more timely reporting on the actual payments made when a director leaves office will be required.
In addition to the new binding vote on forward-looking policy, there will continue to be an annual advisory vote on the implementation of the remuneration policy for executive directors over the previous year. If a company loses the advisory vote it will have to hold a binding vote on its forward-looking policy in the following year.
The precise details of the requirements set out above will be published shortly in the form of amendments to the Enterprise and Regulatory Reform Bill. There will be no consultation process but changes may be made through the normal course of Parliamentary process and debate.
There will also be revised regulations on the content of remuneration reports, both in terms of the forward-looking policy and the implementation of existing policy. In particular, a single figure for remuneration for each director for the previous year will have to be published. This figure will include actual variable pay judged at the end of the relevant performance periods rather than the potential value of new variable pay awards made during the period. There will be consultation on the form of the revised regulations - the proposals as to precisely how the single figure will be calculated are eagerly awaited.
The Financial Reporting Council has announced that, once the Government’s new legislation on voting and reporting on executive remuneration has been finalised, it will consult on potential changes to the UK Corporate Governance Code on:
- Requirements for companies to engage with shareholders and report to the market when votes on executive pay are passed but fail to gain the support of at least a “substantial majority” of shareholders.
- Extending the Code’s existing provisions on claw-back arrangements.
- Limiting the practice of executive directors sitting on the remuneration committees of other companies.
We will issue more detailed updates as further announcements are made on these proposals.