UK: Consultation On Revised Remuneration Reporting Regulations

Last Updated: 26 November 2012
Article by Paul Shapiro and Mark Howard

In June 2012 the Department for Business, Innovations and Skills (BIS) published a consultation paper proposing new standards and regulations for the reporting of executive remuneration. We reported in our previous PLC update on the new legislative framework the Government is proposing aimed at giving shareholders greater influence on the issue of executive remuneration. This current consultation focuses specifically on introducing new regulations which will determine the content of directors' remuneration reports, but can be viewed as part of a package of measures aimed at giving shareholders move power over executive remuneration. The stated policy aim is to "promote a stronger, clearer link between pay and performance in order to prevent rewards for mediocrity or failure, while still allowing for exceptional performance to be rewarded".

Key proposals

The Government in this consultation proposes to introduce a new binding vote on a company's remuneration policy to empower shareholders and encourage improved dialogue. To facilitate this, the revised reporting regulations will provide for two distinct parts in the directors' remuneration report, namely:

  • a policy report setting out all elements of a company's remuneration policy and key factors that were taken into account in setting that policy; and
  • a report on how the policy was implemented, setting out actual payments to directors and details on the link between company performance and pay for the financial year covered by the accounts.

Quoted companies are currently required to produce a directors' remuneration report, the content of which is determined by Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (Reporting Regulations). The above proposals replace rather than add to the current reporting requirements. Each of these proposals is examined in more details below.

Policy report

The proposal is for the policy report to include the following:

  • a table setting out the key elements of pay and supporting information, including how each element supports the achievement of the company's strategy, the potential value and performance metrics;
  • information on service contracts;
  • scenarios for 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;
  • the principles on which exit payments will be made; and
  • material factors that have been taken into account when setting the pay policy, specifically employee pay and shareholder views.

This part of the report will be subject to a binding vote which will be required at a minimum every three years. However, if a company proposes to change their remuneration policy in this period, it would then need to have it approved by a shareholder vote. Companies will only be able to make payments within the allowed limits, until a new shareholder vote is held.

As we discussed in our previous PLC update on the subject, a binding shareholder vote was proposed to be introduced on exit payments to directors of over one year's base salary. This proposal seems to have been watered down to the requirement for companies to set out their approach to exit payments in the policy report, which should include the methodology on how exit payments will be calculated. This will again be subject to a binding shareholder vote.

Implementation report

BIS proposes that this part of the report includes the following:

  • a single total figure of remuneration for each director;
  • detail of performance against metrics for long term incentives;
  • total pension entitlements (for defined benefit schemes);
  • exit payments made in year;
  • detail on variable pay awarded in year;
  • total shareholdings of directors;
  • chart comparing company performance and CEO pay;
  • information about who has advised the remuneration committee; and
  • shareholder context.

BIS proposes that companies will continue to report annually on how the policy has been implemented in the previous year and there will still be an annual advisory vote on the actual payments made to directors.


The key themes throughout the Government's commentary and justification for these proposals seems to be transparency. On numerous occasions there are references to the complexity and sheer size of the current directors' reports being produced. BIS suggests that, so long as this complexity is maintained, shareholders will not be able to engage properly.

An interesting point is also made with regard to transparency of directors' service contracts. Section 228 of the Companies Act 2006 requires companies to keep a copy of every directors' service contract for inspection. However, it is understood that many shareholders have difficulty in obtaining these. Therefore, on the premise that shareholders are primarily interested in the provisions in these service contracts that deal with remuneration, they will be able to review these which much greater ease in these new remuneration reports.

A further element of prescription by BIS is the proposal to have a statement to the shareholders from the chairman of the remuneration committee summarising the key messages on remuneration. This is currently common place but may in the future be a legal requirement.

Next steps

The consultation period closed on 26 September 2012 and so we currently await the Government's report on the responses to the consultation. If these amendments are introduced in their entirety, amendments to the Reporting Regulations will be required. The Government has also said that it will work with the UK Listing Authority to consider whether the requirements of the Listing Rules need to be reviewed. The aim is for these provisions to take effect for companies whose reporting years end after 1 October 2013.

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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