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The Government's proposals on executive pay have changed
slightly since we last reported on this topic in April (see our
article in the April 2012 update). The new
proposals1 published on 20 June 2012 which were
widely reported in the financial press constitute a good compromise
between giving shareholders more influence on executive pay and
avoiding shareholders micromanaging their companies.
In our April 2012 update we reported that the directors'
remuneration report is proposed to be split into a forward- and a
backward-looking section with:
the forward-looking section (referred to as the policy
report) outlining the future remuneration policy and
potential exit payments, and
the backward-looking section (referred to as the
implementation report) explaining how the
remuneration policy was implemented in the previous financial
year.
The policy report
Back in March 2012, the Department for Business Innovation &
Skills (BIS) proposed that the policy report be
made subject to an annual binding shareholder vote requiring a
higher than 50% majority. The Government's new proposal is that
this section of the directors' report be subject to an annual
binding vote only if the company intends to change its remuneration
policy. If no such change is suggested, a binding shareholder vote
would only be requiring once every three years. The required
majority for this vote now appears to be a simple 50% majority of
shareholders rather than a majority of between 50 and 75% as was
suggested earlier this year.
If a company fails the binding vote it will be required to
follow the existing remuneration policy until the shareholders
approve a revised policy.
The implementation report
The backward-looking section of the directors' report is
currently subject to an advisory shareholder vote only and this is
suggested to remain unchanged. If a company fails the advisory vote
it will be required in the following year to seek the
shareholders' binding vote on its overall remuneration
policy.
The implementation report will have to include a single figure
of each director's total remuneration. A methodology for
calculating this single figure has been developed by BIS together
with the Financial Reporting Council's (FRC)
Reporting Lab, companies and investors which "will reflect
actual pay earned rather than potential pay awarded."
Proposed changes to the UK Corporate Governance Code
Where a substantial minority of shareholders votes against the
company's remuneration policy or against its implementation,
the company may be required to publish a statement setting out how
it intends to address shareholder concerns. The FRC will consult on
the necessary changes to the UK Corporate Governance Code to
reflect this new requirement.
What next?
The Government is expected to publish amendments to the
Enterprise and Regulatory Reform Bill shortly to reflect these
proposals. BIS will also publish draft regulations setting out the
format and content of the directors' remuneration report.
These reforms are due to come into force in October
2013.
Comment
We welcome the new proposal of making the future remuneration
policy and potential exit payments subject to a binding 50%
majority vote every three years (unless such policy is due to be
changed) rather than an annual supermajority vote. It strikes a
good balance between giving shareholders more influence on
executive pay and avoiding shareholders micromanaging their
companies.
Although we have not yet seen the proposed methodology for how
the single figure of each director's remuneration shall be
calculated, we expect the proposed requirement to publish such a
single figure to increase transparency and induce remuneration
packages to be less complex and more closely align director pay and
performance. It will also enable investors to more readily compare
and evaluate remuneration packages across companies.
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