Significant reforms to directors' pay by October 2013
20 June 2012
The Government has today (20 June) announced its proposed reform of directors’ pay in listed companies which it intends to be in place by October 2013. The reforms are stated by the Government to be “the most comprehensive reforms of the framework for directors’ remuneration in a decade”. Whilst these reforms only apply directly to listed companies they will undoubtedly have a wider impact on the pay culture in other companies (including those listed on the Alternative Investment Market). Indeed, Vince Cable expressly states: “Employee views on pay are important. That is why I am proposing that companies report on whether they have taken steps to seek the views of their workforce” – a comment which employee forums in non-listed companies may well latch onto.
Measures proposed by the Government include:
- A binding vote by shareholders on pay policy at least every three years unless the pay policy is changed earlier in which case it will require re-approval. Once a policy has been approved by the majority of shareholders voting, companies will not be able to make payments outside of its scope. However, helpfully the focus is on the Board’s pay strategy and not individual pay packages.
- A requirement for the pay policy to clearly set out how pay supports the strategic objectives of the company and include better information on how directors’ pay compares to the wider workforce.
- Companies will also have to clearly explain in their pay policy their approach to exit payments. Where a director leaves, the company will have to promptly publish a statement of payments the director has received. Any exit payment will now need to be made in accordance with the company’s pay policy, as well as the existing Companies Act 2006 provisions dealing with payments to directors for loss of office and any terms relating to termination in the director’s terms and conditions of employment.
- Shareholders will continue to have an annual advisory vote on how a company’s pay policy was implemented in the previous year. A company will need to draw up an implementation report for shareholders to vote on which will need to include a figure for the total remuneration received by each director, including bonuses and long term incentives. The implementation report will also need to contain details of any exit payments made during the year and whether or not the company met its performance measures. It should also provide a comparison between company performance and the Chief Executive’s pay. If a company fails the advisory vote it will be required to put its overall pay policy back to shareholders in a binding vote the following year.
In addition, perhaps in light of the torrid spring a number of UK listed companies have faced, the Government has announced that the Financial Reporting Council will consult on updating the Corporate Governance Code to provide that companies should be required to make a statement when a significant minority of shareholders vote against the company’s pay policy or the way in which it has been implemented. This is intended to publicly hold directors to account.
The Government states in its guide to the reforms that “it is not Government’s role to micromanage companies but instead to create a robust framework to ensure that active shareholder engagement is sustained over the long term…. There is a balance to be struck between investors’ need for clear and specific information to hold companies to account and companies’ requirement for flexibility so they can design and implement pay policies that suit their organisation”. Accordingly the Government has committed that it will continue to work closely with business and investor groups to develop clear guidance on the level of detail and type of information that should be reported. We shall keep you updated on any developments in this respect. Although the reforms are not due to be implemented until October 2013, there will clearly be much for companies to consider over the coming 12 months, including the need to review director service agreements to ensure they are a 'fit' with the company’s pay policy.
The Government will introduce the reforms through amendments to the Enterprise and Regulatory Reform Bill which is currently before Parliament. At the same time, simplified regulations setting out how companies must report directors’ pay will be published. The Government has confirmed that there will be chance to comment on these regulations before they become law.
A copy of the press release issued by the Department of Business, Innovation and Skills can be found here.
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