In March 2012, in our briefing “Executive remuneration: The Government’s proposals”, we reported on the proposals for greater shareholder voting rights in the area of executive pay, as set out in a consultation paper published that month by the Government. The Government has now considered the responses to that consultation and, on 20 June 2012, Vince Cable, the Business Secretary, announced a number of reforms of the framework within which directors’ remuneration is set, agreed and implemented. As explained in our March briefing, these reforms will impact on all UK incorporated quoted companies.
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Binding vote on pay policy
As contemplated in the March 2012 consultation paper, a binding vote on the company’s future pay policy will be introduced. This will be an ordinary resolution, requiring the support of a majority of shareholders voting to pass it, but it will only be required to be passed annually if the company chooses to change its pay policy. If a company leaves its pay policy unchanged then a binding vote on future pay policy will only need to be put to the AGM at least every three years.
Content of future pay policy
The content of the company’s future pay policy will need to include the following:
- A table setting out the key elements of pay and supporting information, including how each supports the achievement of the company’s strategy, the maximum potential value and performance metrics;
- Information on employment 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, including how they will be calculated, whether the company will distinguish between types of leaver or the circumstances of exit and how performance will be taken into account; and
- Material factors that have been taken into account when setting the pay policy, specifically employee pay and shareholder views.
The Government has also indicated that the company’s pay policy will need to explain how directors’ pay relates to the wider work force, and the company will need to report on what steps it has taken into account when setting the pay policy, including seeking the views of employees and shareholders.
What happens if the binding vote is not passed?
In these circumstances, the company will have to continue to follow its existing policy until a revised policy is approved by shareholders. Companies will be able to choose whether to convene a general meeting to consider a revised policy or wait until the next AGM to do so.
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Advisory vote on implementation of pay policy
In place of the current advisory vote on the directors’ remuneration report, there will be an annual advisory vote on the section of the remuneration report which sets out how the company’s pay policy has been implemented, including actual sums paid in the previous year. This will also be an ordinary resolution, requiring the support of a majority of shareholders to pass it.
Content of the implementation report
The information to be reported on will need to include the following:
- 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.
Single total figure of remuneration for each director
The proposed single figure will need to be comprehensive and cover all types of reward received by directors in the previous year, including fixed and variable elements as well as pension provisions. For variable elements of pay, the single figure will need to reflect actual pay earned rather than potential pay awarded and this will include full bonuses awarded for the reporting period and long-term incentives where the reporting year is the last financial year of the performance cycle.
In relation to this, the Financial Reporting Laboratory, set up by the Financial Reporting Council in the autumn of 2011, has published its project report, “A single figure for remuneration”. The Financial Reporting Laboratory has worked with companies and investors on this project and the proposals in the project report describe the components of remuneration that investors involved in the project believe should be contained within total remuneration. These are full salary, all pension related benefits, any full bonus awarded related to the performance year and all other awards that vest in relation to the performance year such as shares under long-term incentive arrangements, options and matching shares under deferred bonus arrangements. The proposals specify how these components should be measured in each case and also prescribe related disclosures. The Financial Reporting Laboratory points out that investors also want companies to report separately the most recent awards relating to long-term incentives, including performance shares and options, which may vest in the future. View the project report.
What happens if the advisory vote is not passed?
In these circumstances, the company will have to put their overall pay policy before shareholders for approval in a binding vote at the next AGM.
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Companies will have to set out their approach to exit payments as part of their future pay policy which will be put to shareholders and be subject to a binding vote. Once shareholders have approved the company’s approach to exit pay, the company will be bound by that policy and so limited in what it can pay departing directors. When a director leaves, the company will have to publish a statement promptly setting out what the director has received and exit payments must also be reported in the implementation report.
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Possible changes to the UK Corporate Governance Code
In light of these reforms, the Financial Reporting Council is to seek views on potential changes to the UK Corporate Governance Code. It will consult on whether companies should engage with shareholders and report to the market if they fail to obtain a substantial majority in support of either the binding vote or the advisory vote on remuneration.
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The Government has stated that in the coming months it will work closely with business and investor groups to develop clear guidance on the level of detail and type of information on remuneration that should be reported. In the meantime, it is to introduce amendments to the Enterprise and Regulatory Reform Bill, which is already before Parliament, to cover these reforms. At the same time, it will publish revised, simplified regulations setting out how companies must report on directors’ pay. The Government intends that all these reforms will be enacted by October 2013.
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We considered the implications of the proposals in our March 2012 briefing. While companies are likely to be relieved that Vince Cable has stepped back from his original proposals in a number of areas, a number of difficult issues that companies will require guidance on remain. It will be necessary to consider the amendments to the Enterprise and Regulatory Reform Bill and the content of the detailed regulations once they are available to understand exactly how these reforms will be implemented in practice.
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