Government unveils overhaul of directors' pay

EXECUTIVE PAY

Government unveils overhaul of directors’ pay

The Business Secretary, Vince Cable today announced reforms of the framework for directors’ remuneration. This package of measures will, according to the Departments for Business, Innovation and Skills (BIS), “address failures in corporate governance by empowering shareholders to engage effectively with companies on pay”.

More specifically, BIS says the reforms will:

• “Give shareholders binding votes on pay policy and exit payments, so they can hold companies to account and prevent rewards for failure.”
• “Boost transparency so that what people are paid is easily understood and the link between pay and performance is clearly drawn.”
• “Ensure that reform has a lasting impact by empowering business and investors to maintain recent activism.”
• “Make it easier to understand what directors are earning and how it links to company performance.”

The government intends the reforms to be enacted by October 2013.

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Key measures

• A binding vote on pay policy, requiring the support of a majority of shareholders voting to pass. The policy should clearly set out, says BIS, “how pay supports the strategic objectives of the company and include better information on how directors’ pay compares to the wider workforce”.

• The binding vote will be held annually unless companies choose to leave their remuneration policy unchanged, in which case it will be compulsory at least every three years. For the first time, once a policy is approved companies will not be able to make payments outside its scope. If a company chooses to change its pay policy, it will have to put it before shareholders for re-approval. BIS says “Importantly, this will encourage companies to devise long-term policies and put a brake on annual pay ratcheting.”

• As part of their pay policy, companies will have to clearly explain their approach to exit payments, which will also be subject to the binding vote. When a director leaves, the company will have to promptly publish a statement of payments the director has received. Companies will not be able to pay exiting directors more than shareholders have agreed.

• Alongside the binding vote on policy, shareholders will continue to have an annual advisory vote on how pay policy was implemented in the previous year, including actual sums paid to directors. If a company fails the advisory vote, it will be required to put its overall pay policy back to shareholders in a binding vote the following year.

• In addition, the Financial Reporting Council will consult on updating the Corporate Governance Code so that companies should make a statement when a significant minority of shareholders vote against a pay resolution.

• Companies will have to report a single figure* for the total pay directors received for the year. This figure will cover all rewards received by directors, including bonuses and long-term incentives. Companies will also have to report details of whether they met performance measures and a comparison between company performance and chief executives’ pay.

To introduce these reforms, the government will shortly bring forward amendments to the Enterprise and Regulatory Reform Bill, which is currently before Parliament. Revised, simplified regulations setting out how companies must report directors’ pay will be published at the same time. This will include measures to make pay reports clearer and more transparent for investors. BIS says: “In line with good policy making, we will give people the chance to comment on these regulations before they become law.”

A final word

“At a time when the global economy remains fragile, it is neither sustainable nor justifiable to see directors’ pay rising at 10% a year, while the performance of listed companies lags behind and many employees are having their pay cut or frozen.

“In January we kicked off a national debate aimed at encouraging shareholders to become more actively engaged as company owners in better aligning directors’ pay with performance. I have been greatly encouraged by the ‘shareholder spring’ and I want to see that momentum sustained. That is why I am bringing forward legislation to strengthen the powers of shareholders through a binding vote on pay.” - Vince Cable, Business Secretary.

Want to know more?

A detailed statement of the government’s policy on directors’ pay is available at www.bis.gov.uk/policies/business-law/corporate-governance/executive-pay.

* The FRC’s Financial Reporting Lab has developed a methodology to calculate the single figure. For variable elements, the single figure reflects actual pay earned rather than potential pay awarded. This includes full bonuses awarded for the reporting period; and long-term incentives where the reporting year is the last financial year of the performance cycle.