UK: Reporting On Executive Pay – The New Regime At A Glance

Last Updated: 28 October 2013
Article by Kate Ball-Dodd, Andrew Stanger, Kirsty Payne and Annabel Evans

Keywords: executive pay, Companies Act, capital markets, executive remuneration, accounting regulations,

The much-heralded changes to the rules on the reporting of directors' pay are now in force. The new rules (principally set out in new accounting regulations which form part of the Companies Act regime on the contents of company reports and accounts) apply to companies with financial years starting on or after 1 October 2013 and bite first for companies with a 30 September year end. Here is our "at a glance" comparison between the old and new regimes. It includes key comments from the Directors' Remuneration Reporting Guidance issued by the GC100 and Investor Group on 12 September 2013 (the "Guidance").

OLD REGIME ON REPORTING EXECUTIVE PAY

NEW REGIME ON REPORTING EXECUTIVE PAY

Which companies are affected?

Quoted companies (not AIM)

No change. Applies to quoted companies (not AIM)

What documents do you have to produce?

Since 2002, quoted companies have had to include a directors' remuneration report in their annual report, containing both forward and backward looking information on executive pay.

The overarching requirement to issue an annual directors' remuneration report remains. But this must now contain distinct sections setting out:

  • the company's overall remuneration policy;
  • how that policy has been implemented during the relevant financial year (implementation report).

Strictly, the annual report only has to set out the directors' remuneration policy in years when that policy is to be voted on by shareholders (see below). But it will be good practice to include it each year for reference.

In the remuneration report, a forward looking policy statement focussed mainly on performance conditions. No statutory sanctions for making payments to executives outside the policy.

The remuneration policy must set out the company's approach to all categories of executive remuneration including, importantly, payments for loss of office.

Significantly, payments to directors outside the policy are prohibited once the policy has been approved by shareholders. If a policy vote fails, the company is permitted to continue making payments in line with a previously approved policy (if any).

The policy must give illustrations of the level of payments that might be made for different standards of performance – so that the information in it is meaningful and understandable.

In the remuneration report, a backward looking element including prescribed information on salaries, bonuses, benefits etc. paid to directors in the relevant financial year.

The implementation report must set out how the remuneration policy has been implemented during the relevant financial year. The detailed contents requirements have been amended and augmented.

As well as details of pension entitlements and LTIP awards, it must contain a single total figure for each director of all sums paid to him or her (including salary, pension and other benefits and bonus and incentive awards) in the relevant financial year. This is designed to ensure consistency of information across companies.

What do shareholders vote on?

Advisory vote on directors' remuneration report every year.

The remuneration policy is subject to a binding shareholder vote, at least once every three years (or earlier if amended before then).

The implementation report continues to be subject to an advisory vote every year. But the vote now has teeth. If it is not passed in any year, this triggers a requirement for the remuneration policy to be put to a shareholder vote the following year, whether or not it would otherwise have been due for approval.

While companies can choose to put their remuneration policies to shareholders more frequently, the GC100 and Investor Group is strongly in favour of ensuring the remuneration policy is only put to shareholders triennially i.e. it should be "intended to stand the test of time".

Where there has been a significant percentage of votes against either of the remuneration resolutions at the last AGM, the company must disclose the reasons (if it knows) and describe any actions it has taken in response. The Guidance suggests 20% is a "significant percentage" for these purposes.

When does remuneration policy take effect?

Policy statement not binding, so not relevant.

In the first year, companies may choose when they want their remuneration policy to take effect (e.g. immediately on approval or delayed until the start of the next financial year). The Guidance recommends the policy should take effect as soon as it is approved (although in the first year this will mean the targets already set for directors at the beginning of the financial year are subject to approval).

In the first year, companies will need to focus carefully on getting their remuneration policy approved before the statutory long stop date (explained below). If the first ever policy vote fails at the company's annual general meeting, there will be no fall back policy from previous years. The company would have no choice but to call a further general meeting to put a (revised if necessary) remuneration policy to shareholders.

The long stop date effectively requires companies to have an approved remuneration policy in effect by the end of the company's first financial year starting on or after 1 October 2013.

Can you exclude confidential information?

Information only has to be included if and to the extent that it is "contained in the company's books and papers", or publicly available or the company has the right to obtain it.

No need to include information about performance measures or targets that is, in the opinion of the directors, "commercially sensitive in respect of the company".

The Guidance suggests that a measure or target may be "commercially sensitive" if its disclosure is "likely to damage the company's commercial interests".

What are the sanctions for non-compliance?

Potential liability to compensate the company for untrue or misleading statements or omissions for directors who knew or were reckless as to whether they were untrue or misleading.

Directors' potential liability for inaccuracies or omissions remains.

There are also new penalties for making payments to executives outside an approved remuneration policy. Any director authorising the payment may have to indemnify the company for any loss.

Is the shareholder resolution ordinary or special business for the purposes of the Listing Rules?

The shareholder resolution approving the directors' remuneration report is ordinary/routine business and so does not have to be accompanied by an explanatory circular or require any pre-vetting by the Financial Conduct Authority.

We do not expect there to be any change of status as far as the shareholder resolution approving the remuneration report is concerned. We also expect resolutions approving remuneration policies to qualify as ordinary/routine business for these purposes.

Comment

Kate Ball-Dodd, corporate and securities partner, comments: "Key to the approval and successful operation of a remuneration policy is the balance struck between flexibility, so that the company is not prevented from making the payments it needs to make to recruit or retain the right people, and certainty, so that investors can be satisfied all payments will be appropriate. The suggestion in the Guidance that companies might consider including an "emergency" discretion in remuneration policies for use in genuinely unforeseen and exceptional circumstances may well prove helpful for many companies."

Andrew Stanger, partner in our employment and benefits group, comments that "To take a particular example, leaver provisions in long term incentive plans will need to be covered in the policy in sufficient detail to ensure that payments made on the departure of a director do not fall outside the policy as unauthorised payments for loss of office".

Originally published 21 October 2013

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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