UK: Directors’ Remuneration Reports – An Update

Last Updated: 17 December 2002

The UKLA has now said it does not plan to make any immediate changes to the Listing Rules requirements on directors’ remuneration reports to reflect the new Directors’ Remuneration Report Regulations. Listed companies will therefore have to contend with two overlapping regimes for the disclosure of directors’ remuneration.

The Institute of Chartered Secretaries and Administrators (ICSA) has produced a guidance note for listed companies, and the Auditing Practices Board (APB) has issued a Bulletin on the new requirements for auditors.


The Directors’ Remuneration Report Regulations 2002, which came into force on 1 August 2002, introduced a new statutory disclosure and shareholder approval regime for directors’ remuneration. They require UK quoted companies to produce a directors’ remuneration report for each relevant financial year and to put a resolution on that report to shareholders at each annual general meeting. ("Quoted companies" are those whose shares are listed on the Official List of the UKLA; or listed on another principal European stock exchange; or admitted to dealing on the New York Stock Exchange or Nasdaq.) The Regulations amended Part VII (Accounts and Audit) of the Companies Act 1985 and added a new Schedule 7A to that Act, which sets out the detailed requirements for the form and content ofthe directors’ remuneration report. The new requirements apply with regard to financial years ending on or after 31 December 2002, which means that they will apply to most UK quoted companies’ next report and accounts.

For companies who send shareholders a summary financial statement instead of a full copy of the directors’ report and accounts, the Companies (Summary Financial Statement) Amendment Regulations 2002 provide that this mustnow include a summary of information from the new form of directors’

remuneration report, and the new performance graph required by the Regulations, as well as the existing summary information from the report and accounts.

We issued a briefing on the new Regulations, and the steps which we suggest companies should take to prepare themselves for the new regime, in August 2002. For further copies, see the contact details at the end of this bulletin.

This update covers three new developments – the position under the Listing Rules and the ISCA and APB guidance on the Regulations.

The Listing Rules

The Listing Rules, and the Combined Code on Corporate Governance which is appended to the Listing Rules, already require a lot of detail about directors’ remuneration to be included in an annual remuneration report. The UK Listing Authority (UKLA) previously said that it would consider amending the Listing Rules disclosure requirements in the light of the new Regulations. However, the UKLA’s current position is that it has no plans for any immediate changes to the Listing Rules. It intends to notify all subscribers to the Listing Rules of this in a newsletter to be issued before Christmas.

This means that, for the foreseeable future, listed companies and their advisers will have to ensure that they comply with both regimes. As both cover the same subject matter, but word their requirements differently, those preparing remuneration reports will need to look carefully at the detail of both. There is the potential for confusion, as in several respects the two require similar, but not identical, disclosures. Some examples are described below:


Under the Listing Rules, where a director has rights under a defined benefit scheme, the remuneration report could either disclose the transfer value of any increase in accrued benefits during the year, or make various narrative disclosures. Under the new requirement (in Paragraph 12, Part 3, Schedule 7A to the Companies Act 1985) there is no option to make narrative disclosures; the transfer value of the increase must be given. This therefore takes precedence over the Listing Rules alternatives.

Long term incentive schemes (LTIS)

The Listing Rules definition of LTIS (in the Definitions section of the Listing Rules) excludes deferred bonus schemes, which means that such schemes do not generally require shareholder approval under the Listing Rules. By contrast, the new Regulations do not provide for such a carve-out, and as a consequence the requirements on LTIS apply to deferred bonus schemes. Therefore any proposed changes to a deferred bonus scheme will need to be disclosed, and the requirement to explain the absence of a performance condition will apply (Paragraph 3, Part 2 of Schedule 7A).

Pensionable remuneration

Listing Rule 12.43A requires explanation and justification of any element of remuneration, other than basic salary, which is pensionable. This requirement is not found in the new Regulations but, by virtue of the Listing Rules, will still apply to listed companies.

Combined Code

The provisions of the Combined Code continue to apply, so listed companies should have regard to Schedule B to the Code, on the contents of the remuneration report. This says that if grants under executive share options or other long-term incentive schemes are awarded in one large block rather than phased, the report should explain and justify this. This is not found in the new Regulations but, nevertheless, the Combined Code requirement will apply. (The requirement that new long term incentive schemes should be approved by shareholders also continues to apply.)

ICSA Guidance Note

ICSA notes that the directors’ remuneration reporting requirements are both detailed and complex, and that the overlapping categories and duplication are a source of confusion. It has produced a short guidance note which aims to give a clear and concise picture of a company’s obligations under the Regulations and the Listing Rules. This is available on its website

The guidance note sets out in bullet-point form the information that must be included in the directors’ remuneration report. It is intended to be used as a checklist of the requirements, rather than an analysis of the areas of overlap.

Auditing requirements

The information required by new Schedule 7A is divided into two parts. Part 2 sets out the information which is not required to be audited, and Part 3 the information which is subject to audit. The Auditing Practices Board has published Bulletin 2002/2 (The United Kingdom Directors’ Remuneration Report Regulations 2002) which is available on its website

The auditors are required to report to the company’s members as to whether the "auditable part" of the remuneration report has been properly prepared in accordance with the Companies Act 1985. The Bulletin gives suggested wording for the opinion paragraph of the auditors’ report. It points out that the auditors will need to describe accurately in their report which elements of the remuneration report they have audited. Companies, therefore, need to make the disclosures in a way that makes it clear which elements have been audited. The Bulletin suggests that these could be set out in a discrete section under a suitable heading, such as "audited information". It recommends that auditors should make arrangements with the directors, well in advance of the year end, to ensure that the audited disclosures will be clearly distinguished from those that have not been audited.

The Bulletin also points out that quoted companies are still required to disclose the information specified in paragraph 1 of Part I of Schedule 6 to the Companies Act 1985, on aggregate directors’ emoluments. The definition of "emoluments" in the Act differs from the definition of "remuneration" and so the financial statements may disclose aggregate directors’ emoluments that may differ from the aggregate directors’ remuneration disclosed in the directors’ remuneration report. The Bulletin states that where the difference between the two is material, the auditors should encourage the directors to provide an explanation of the difference.

The Bulletin, too, acknowledges that there is a certain amount of duplication between the new statutory requirements and those contained in the Listing Rules, and points out that additional care will be needed when auditing disclosures of directors’ remuneration.

© Herbert Smith 2002

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

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