In January 2013, the Government announced that they would be taking measures to deal with the key issues surrounding executive pay, in line with responses to earlier consultations (see our April and July 2012 updates). On 11 March 2013, the Department for Business, Innovation and Skill (BIS) published a revised draft of the regulations (the Draft Regulations) containing the form and content requirements of the directors' remuneration report.1
The Draft Regulations set out the proposed changes to the regulations governing directors' remuneration reporting including remuneration disclosure and an overall structure for executive pay. BIS has recently published frequently asked questions on the reforms which focus particularly on explaining the new voting regime.
As reported, the directors' remuneration report will comprise of two reports: (i) the policy report and (ii) the implementation report. Listed below are some of the key drafting changes included in the Draft Regulations.
The policy report
The policy report should set out all elements of a company's remuneration policy and all key factors that were considered in agreeing the policy.
This part of the report is set out in part 4 of the Draft Regulations and is subject to the new binding shareholder vote requiring a 50% majority. The policy report shall set out the company's proposed policy on director remuneration and potential payments and must be prepared in years when a binding shareholder vote on the directors' remuneration policy is due, that is, either annually or at least every three years.
There have been a number of technical changes in the latest Draft Regulations and some new requirements were added including the following:
- The policy report must disclose the principles that a company would apply when agreeing a remuneration package for a new director, including the maximum level of salary;
- a statement from the chair of the remuneration committee must be included; and
- information relating to non-executive directors can be split out from information relating to executive directors.
The policy must include a table describing how each element of pay supports the short term and long term objectives of the company.
Once the policy has been approved by shareholders, companies will be restricted to act within the scope of that policy in relation to directors' pay. This is with the view that companies need to provide clear and specific information to investors while balancing the ability for companies to retain sufficient flexibility to implement appropriate pay policies.
The implementation report
This will be an annual report which sets out how the remuneration policy was implemented during that reporting year. This report must include a table with various details, including a single remuneration figure for each director. The actual payments for the previous financial year must be included and details of the link between company performance and actual pay must be shown. A new requirement is to disclose payments made in the financial year to past directors.
This report will be subject to an annual advisory shareholder vote (i.e. non-binding) in order to approve directors' pay for the past year. If the advisory vote fails, the company must remuneration policy must can be submitted for re-approval at the following year's AGM or a new policy proposed.
Comment
The new regulations are expected to take effect for financial periods ending after 1 October 2013. Labour in the House of Lords are seeking to amend the binding vote to a 75% vote rather than a 50% vote which could prove problematic for companies. The new regulations have faced significant criticism in being cumbersome, complex and failing to deliver useful information to investors in a digestible manner.
Pensions implications (by Clive Weber)
The proposed amendments relate not only to how corporate accounts should record salary, fees and other specified items but also to all pension related benefits. This includes cash paid in lieu of pension provision and the benefits derived "in a year" from participating in money purchase and/or defined benefit pension schemes. The measurement basis for pension benefits accruing in the year are specified and adopt the "HMRC method" of valuing pension accrual.
Unfortunately, HMRC's method of valuing defined benefits is highly complex and applies differently in varied circumstances. Therefore far from producing a level playing field for shareholders' information, adopting the HMRC method in the form proposed under the Draft Regulations may simply confuse matters. It is to be hoped that the Government will revisit and simplify this part of the Draft Regulations.
Footnotes
1.The revised draft Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2013 are available here.
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