The Department for Business, Innovation and Skills (BIS) has
published the latest instalment on legislative proposals for
greater shareholder voting rights on executive director pay in
listed companies. Its consultation paper follows
Vince Cable's discussion paper on executive remuneration
published last Autumn and a speech in January on this subject
(please click
here for our earlier Law-Now).
These proposals, which now look virtually certain to take
effect, will have a significant impact on executive director
remuneration and also (in combination with other narrative
reporting proposals) lead to major changes in listed company AGM
business and their directors' remuneration reports.
One piece of good news is that only UK incorporated companies with
shares admitted to the Main List (Official List) will be
affected – AIM and private companies are not included in
these proposals.
The current intention is that the legislation will affect year
ends after 1 October 2013. We plan to send out a fuller
analysis soon, but the key points on these radical proposals
affecting executive directors' financial relationships with
their employers are:
Binding annual vote on future remuneration policy
Shareholders will be required to approve the
remuneration policy for directors for the current financial
year (see below for further discussion on what level of approval
will be needed). This will cover increases in
salary, the level and criteria for
performance-related pay (bonuses or share
awards), material changes to service contracts,
pensions and other benefits.
Where the vote is lost, the company will either have to rely on
the previous policy or seek approval for revised proposals within
90 days of the original vote. The default position of
applying the previous year's policy addresses the fear that
directors could not be paid in the event of a no vote.
Although companies' and investor groups' responses to the
proposed legislation will become clearer over time, one response
may be to adopt as general an approach as possible so as to give
companies maximum leeway.
Given that companies' AGMs are not held until at least four or
five months into the financial year, this will mean that any
changes to existing arrangements before the AGM will in effect be
contingent on shareholder approval, and actions taken after the AGM
will have to be in accordance with this policy or else they will
not be effective.
When hiring new recruits during the year, it is proposed that the
remuneration package offered must be confined to the limits and
structures in the approved remuneration policy. This may give
companies less flexibility when negotiating contracts with
new hires than they have been used to.
Increasing the threshold of support required to approve future remuneration policy
At present, the annual advisory vote on remuneration policy is passed by a simple majority of votes cast. To encourage greater engagement with shareholders, the Government proposes increasing this threshold for approving future remuneration policy, possibly to as high as 75%. The consultation paper seeks views on what the appropriate threshold should be.
Advisory annual vote on how remuneration policy has been implemented
Shareholders will have an advisory vote on how the company has
implemented its remuneration policy over the previous year, similar
to the existing advisory vote.
Companies will be required to report on how they have taken into
account the results of previous advisory votes when designing
future remuneration policy and its implementation. Where less
than 75% of votes are cast in favour, companies will be required to
issue a statement within 30 days detailing the outcome of the vote,
the main issues raised by shareholders and how the company proposes
to work with shareholders to address them.
To facilitate these changes, it is proposed that the content of the
existing directors' remuneration report will be more focused
and split into two sections. The first will outline the
proposals for future remuneration policy, including details of
potential payouts, but will require much more justification than at
present. The second will explain how remuneration policy has
been implemented over the previous year. The stated aim
is that shareholders will be provided with clearer and more useful
information which they can use to make more informed decisions
about the way in which they should cast their votes.
Binding vote on termination packages
Shareholders will have to approve any director's
termination package which exceeds one year's base salary
before any excess can be paid or delivered. Vesting
of options and LTIP awards, payment of any part year bonuses and
amounts in lieu of benefits (whether they are contractual rights or
discretionary entitlements) would be included as part of the value
of the package. Approval will be required on a case by case
basis at a general meeting after termination, with detailed
explanation being given for how proposed amounts have been
derived. A majority of shareholders must vote in favour of
the proposals for any excess payment to be permitted.
Companies will not be able to obtain shareholder approval in
advance of termination, which is the approach commonly taken in
Australia, and so would, if a higher payout is proposed, need to
defer making termination payments in excess of one year's base
salary until approval is received.
What executive directors can receive on termination from 1 October
2013 therefore looks highly likely to be capped at one times
salary, unless shareholders permit higher payouts which seems
unlikely as a matter of routine. This is considerably less
than executive directors have been receiving and so is a sea change
in UK remuneration practice. As most executive directors
already receive one time salary in notice pay, it therefore means
that receipt of any bonus or share entitlements or even cash in
lieu of benefits is going to be dependent on a shareholder
vote.
Timetable for change
The deadline for responding to the consultation is 27 April 2012
and final proposals are expected to be announced in the
summer.
The Government intends that any legislative changes will be
introduced later this year, subject to Parliamentary time being
available, and will apply to financial years ending after 1 October
2013 and to directors whose contracts are terminated after
that date.
A copy of the consultation paper is available
here.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 20/03/2012.