Reporting framework for directors' pay - draft regulations issued

EXECUTIVE PAY

Reporting framework for directors’ pay - draft regulations issued

The government has published draft regulations determining what companies must disclose in pay reports. These will fully replace existing rules and are designed to create a “robust framework within which directors’ pay is set, agreed and implemented”.

The Department for Business, Innovation and Skills (BIS) says the revised regulations will:

• “streamline company disclosure requirements so that reports are focussed on making the link between pay and performance crystal clear”
• “introduce a new requirement to report the total pay directors received for the year as a single figure”
• “ensure shareholder engagement is sustained over the long term.”

The regulations follow last week’s announcement [E-reward News] by the Business Secretary, Vince Cable of the “most comprehensive and radical reform of the governance of directors’ pay in a decade, including the introduction of a new binding vote on company pay policy”.

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New two-part remuneration reports

To support the new shareholder voting regime, remuneration reports will in future be split in two parts:

1. Forward-looking policy report, which will be subject to the binding shareholder vote. Once approved, the company will only be able to make payments within the limits it allows.

For the first time, companies will be required to set out “every element of pay that a director could be entitled to and how it supports the achievement of strategic objectives, the maximum value and performance measures that will be applied”.

The report will also set out:

• 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.
• Principles on which exit payments will be made, including how they will be calculated and how performance will be taken into account.
• Information on employment contracts.
• Factors the company has taken into account when deciding on pay policy, including employee pay levels and views.

2. Report on how the policy was implemented, which will be subject to an annual advisory vote.

This report will include details of actual payments made, set out as a single figure for the total pay directors received for the year. The figure will cover all rewards, including bonuses, long-term incentives and pension provision. For the first time this will allow shareholders to make comparisons between the pay directors receive year-on-year, and between companies.

The report will also include:

• Information on how well companies performed against conditions and how this impacted on the overall level of pay.
• Total pension entitlements (for defined benefit schemes).
• Exit payments awarded in the reporting period.
• Details on the potential future value of new variable awards made in year.
• Total shareholdings of directors.
• A comparison between company performance and the Chief Executives’ pay.
• Information about who has advised the remuneration committee.
• Details on how shareholders voted at the previous AGM and any action the company took in response.

For variable elements of pay, the single figure will reflect actual pay earned rather than potential pay awarded. This includes:

• full bonuses awarded for the reporting period
• long-term incentives where the reporting year is the last financial year of the performance cycle.

The regulations are expected to come into effect from October 2013, alongside primary legislation on binding votes. Today the government has also tabled amendments to the Enterprise and Regulatory Reform Bill that will allow the new voting regime to become law.

A final word

“Over the last decade directors’ pay has quadrupled with no clear link to company performance. At the same time company reports have become increasingly complex without giving shareholders the information they need.

“These regulations will significantly improve reporting. For the first time companies will be required to set out every element of pay that a director could be entitled to and how it supports long-term company strategy and performance. If the policy isn’t specific enough, shareholders will have a legally binding vote they can use to reject it.

“Companies will also have to clearly disclose directors’ pay in a single figure. This means that it will no longer be possible to mask what they are actually earning. I expect shareholders to use this new framework to maintain recent activism and challenge companies to inject greater pay discipline and prevent rewards for failure.” - Business Secretary, Vince Cable.

Want to know more?

Consultation on the draft regulations closes on 26 September 2012 and is available at www.bis.gov.uk/Consultations/directors-pay-revised-remuneration-reporting-regulations.

The Enterprise and Regulatory Reform (ERR) Bill was introduced on 23 May 2012. At that point the government was still considering the responses to the consultation on enhanced shareholder voting and was not in a position to include a full set of clauses. The Bill is now in Committee stage and it is anticipated that the amendments introduced today will be debated before parliament breaks for the Summer recess.

The amendments to the Bill can be found at http://discuss.bis.gov.uk/enterprise-bill/.

The amendments include details of how the new binding vote will interact with directors’ contracts. Any payments made under obligations in contracts entered into, amended or renewed after 27 June 2012 will need to be consistent with the primary legislation at the point it takes effect and those payments are made.

The government has published a summary of the responses received during the consultation launched in March 2012, Executive Pay: Shareholder Voting Rights, visit www.bis.gov.uk/assets/biscore/business-law/docs/e/12-918-executive-pay-consultation-shareholder-voting-responses [downloads document]