Reform of Directors Remuneration

Overview

The Companies Act 2006 currently provides for shareholders to have a non-binding vote on directors’ pay, with annual remuneration being disclosed in the directors’ remuneration report. There has however long been criticism about the adequacy of these disclosure requirements. It is hoped that the new reporting framework will provide increased transparency, a clear link between pay and performance and greater shareholder engagement. The press announcement states that, from 01 October 2013, "investors will be better informed about how much directors have been and will be paid along with how this relates to the company performance".

Content of reports

Directors’ remuneration reports will have to include:

a) a statement from the remuneration committee chairman of the major decisions on directors’ remuneration made during the year, any substantial changes made during the year and the context in which those changes occurred and decisions have been taken;

of the major decisions on directors’ remuneration made during the year, any substantial changes made during the year and the context in which those changes occurred and decisions have been taken;

b) the directors’ remuneration policy setting out a forward-looking policy on remuneration, including payments for loss of office and disclosure of key factors taken into account when setting the policy. This part of the report will be subject to a binding shareholder vote and will only have to be produced when there is a shareholder vote on it, which, if the annual advisory vote is approved, has to be at least every three years; and

setting out a forward-looking policy on remuneration, including payments for loss of office and disclosure of key factors taken into account when setting the policy. This part of the report will be subject to a binding shareholder vote and will only have to be produced when there is a shareholder vote on it, which, if the annual advisory vote is approved, has to be at least every three years; and

c) the annual report on remuneration showing how the remuneration policy has been implemented in the reporting year, including:

showing how the remuneration policy has been implemented in the reporting year, including:

i. actual payments made to each director set out as a single figure. There will be a prescribed table format for each director’s remuneration showing salary and fees, benefits in kind, pension-related benefits, bonus, awards under long-term incentive plans and a total figure. The Regulations define how this should be calculated so that all companies are consistent in their approach;

ii. payments made for loss of office; and

iii. disclosure of the link between company performance and pay.

This report will be required annually and will be subject to an advisory shareholder vote. Some parts of the report will have to be audited. The Regulations set out minimum requirements and directors can include such additional information as they think fit.

Although unquoted and private companies will not be subject to the Regulations, it is anticipated that many will apply similar procedures to promote effective governance practice and shareholder satisfaction.

Timing

The Regulations will come into force on 01 October 2013 and apply to any financial year ending on or after 30 September 2013. So if a company’s year end is 31 December 2013, the provisions will apply to the annual report and accounts for the year ended 31 December 2013 which are laid in the 2014 AGM. At this AGM, both the remuneration policy and the report on remuneration will have to be put to shareholders for approval. If approval for the policy report is not obtained, a separate general meeting will need to be called. Approval must be obtained by the start of the second financial year starting on or after 1 October 2013, from which date payments must be consistent with the approved policy or otherwise subject to a shareholder resolution.

Enforcement

The Regulations do not apply to payments made under contracts agreed before 27 June 2012, though this exemption ceases to apply if the contract is modified or renewed after that date. Other contractual requirements to make payments which are inconsistent with the approved policy will not be valid.

Practical issues

TMF Group recommends that those responsible for remuneration in quoted companies start planning now:

a) Are you contemplating a major overhaul? If so, complete quickly and before the year end.

b) If not, what changes are needed to the existing pay policy to bring it in line with the new requirements?

c) Do any existing contracts need amending?

d) Have any pre-27 June 2012 contracts been amended?

e) Start/Continue the dialogue with your investors now.

f) Work with networks/trade bodies to identify problems – get guidance on areas causing difficulties.