UK: Disclosure And Governance Of Directors’ Remuneration The Enterprise And Regulatory Reform Bill

Last Updated: 21 August 2012

Article by Robert Collard and Ian Shaw

Over the last decade directors' pay has quadrupled with no clear link to company performance. At the same time company reports have become increasingly complex without giving shareholders the information they need...I expect shareholders to use this new framework to maintain recent activism and challenge companies to inject greater pay discipline and prevent rewards for failure."

(Rt. Hon. Vince Cable, June 2012)


  • The Government proposes to address the perceived lack of linkage between executive pay and performance in quoted companies by increasing the power of shareholders and imposing additional disclosure requirements in respect of executive remuneration. These changes will be implemented as part of the Enterprise and Regulatory Reform Bill (the Bill), which is currently going through Parliament.
  • In summary, the key proposals are as follows, although the draft legislation is not yet finalised and the position is therefore subject to change:
    • The introduction of a binding vote on the company's future remuneration policy, as set out in the policy report (for details of which, see below). As a result, a quoted company will only be able to make payments to directors within the limits set out by its policy.
    • Each quoted company will need to put its policy to shareholders at the annual general meeting in the financial year beginning after the Bill becomes law: approval will be by simple majority.
    • If the company wishes to change its policy, it will require shareholder approval (again, by simple majority).
    • If the policy is left unchanged, it will still be subject to a further binding vote every three years.
    • An annual advisory vote on the implementation of the current remuneration policy, including actual sums paid, will be retained. If the company loses this vote it will have to put its policy report to a binding shareholder vote.
    • A requirement for details of a company's approach to exit payments to be included in the future remuneration policy and therefore made subject to the binding vote. When a director leaves, the company will be required to announce the amount of any exit payment the director received.
  • The Government is proposing to introduce additional disclosure requirements to support the new shareholder voting regime. It is currently consulting on draft regulations, to which responses must be made by 26 September 2012.
  • The draft regulations set out the details required to be included in the forward-looking policy report and the backward-looking implementation report. The key features of both are set out below.


  • Subject to the binding shareholder vote (at least every three years).
  • Once approved, the company will only be able to make payments within the limits the policy allows.
  • Must include:
    • the maximum value of and the performance conditions that will be applied to every element of pay to which a director could be entitled, and how these support the achievement of the company's strategic objectives;
    • graphs showing what directors will get paid for performance that is above, on and below target;
    • information on the percentage change in profit, dividends and the overall spend on pay;
    • principles on which exit payments will be made, including how they will be calculated and how performance will be taken into account;
    • details of the remuneration provisions in directors' employment contracts; and
    • factors the company has taken into account when deciding on remuneration policy, including employee pay levels and the views of employees and shareholders.


  • Subject to an annual advisory vote.
  • Explains how the policy contained in the policy report was implemented in the past financial year.
  • Must include:
    • a single figure for the total pay each director received for the year - including bonuses, long term incentives and pension provision;
    • the single figure will reflect actual pay earned rather than potential pay awarded. For variable elements of pay, the Government proposes that this includes remuneration that becomes receivable as a result of the achievement of conditions relating to performance in the reporting year. Where the performance period is longer than a single year, it should reflect the remuneration where the financial year being reported on is the last year of the performance cycle. This includes the value (or an estimated value) of long term incentives where final vesting is determined as a result of the achievement of performance conditions that end in the year being reported on;
    • details of any exit payments made in the year;
    • information on how well the company performed against performance conditions and how this impacted on the overall level of pay - including a comparison between company performance and the chief executive's pay;
    • details of the potential future value of new variable awards made in the year; and
    • the results of shareholder votes at the previous AGM and an explanation of any action the company took in response.


  • As is the case with the existing measures on directors' remuneration, the new requirements will apply to all 'quoted companies', so will include UK-incorporated companies which are officially listed in an EEA State or admitted to dealing on either the New York Stock Exchange or the Nasdaq, but will not include companies on AIM.


  • The restrictions on remuneration and exit payments will apply from the date the company's first directors' remuneration policy is approved, or, if earlier, from the end of the first financial year of the company beginning after the legislation comes into force, expected to be 1 October 2013.
  • Payments to directors (or persons to be directors) under contracts made before 27 June 2012 are outside the scope of the new provisions, provided they are not amended (for example, to effect a salary increase) or extended.


  • The Bill states that any remuneration or exit payment in breach of the legislation will be held by the recipient on trust for the company or other person making the payment.
  • In addition, the Bill provides that any director who authorised the payment will be jointly and severally liable to indemnify the company.


  • Where entering into or amending contracts with directors, companies should now be including provisions dealing with the potential application of the legislation.
  • Companies should start considering how to formulate their forward-looking remuneration policy and consider whether they wish to contribute to the consultation process before it closes on 26 September 2012.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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