Top executives in many companies are used to their pay and benefits details being disclosed in the annual report. After all, disclosures on remuneration policy are one of the clearest ways for shareholders and others to judge whether board governance is strong enough. In 2012, we experienced a noisy “shareholder spring” on excessive executive remuneration, even though a detailed analysis shows that advisory votes against pay policies were actually no more “anti” than in earlier years. However, public anger over large executive pay deals is not about to subside.
Directors of UK incorporated companies that are listed on at least one of the London or New York Stock Exchange, the NASDAQ or an EEA exchange, are probably already aware that the disclosure requirements will change from reporting years ending after 1 October 2013. The UK Department for Business, Innovation and Skills (better known as BIS) is preparing for a new disclosure regime in order to make it easier for shareholders to hold boards to account if they don’t like what they read in the disclosures. The chairs of remuneration committees in affected companies are already consulting with representatives of their major shareholders to find out how they are likely to vote – this year under the old regulations but also with an eye to the new ones.
What specifically will be new? Well, BIS has not finalised the detail of the new disclosure regulations as yet but we can be pretty sure of the following new features:
- The introduction of two parts to the remuneration report – a policy report which will explain the company’s executive remuneration policy, and an implementation report which will give actual details of individual director pay and benefits in the past year. There will be specific requirements as to the contents and format of each report.
- The policy report will be subject to a binding vote (50 %+) and will be held every three years. However, it will have to repeated sooner if the policy is changed sooner or if shareholders voted against (50 %+) the implementation report the year before.
- The implementation report will be subject to an advisory vote every year (also 50 %+).
There is no space here to go into the detailed requirements of the policy and the implementation reports. It is possible that aspects of these will change before BIS finalises the regulations. However, we can expect to see some important new content in remuneration reports. This will include: commentary on how each pay element supports the achievement of company strategy, what pay outs can be achieved dependent on different scenarios of company performance, what maximum pay rises would be, what pay can be expected by a new hire, whether claw back applies, what will be paid on termination, comparisons to pay and benefits for all employees, how shareholder views have been taken into account, a chart showing both what Total Shareholder Return and director pay has been (possibly over 10 years). A single figure will also be introduced according to an approach determined by the Financial Reporting Council so that the total value of directors pay and benefits can be compared across companies and sectors.
A future edition of Just Rewards will give the final details of the disclosure regulations. BIS currently expect final details to be available “in the spring”. Watch this space. However, companies affected by the regulations, as well as those, who like to follow them as much as possible, should be preparing themselves now. After all you might want to see what your policy will look like once reported in the required formats and whether you have any tidying up of contracts to do. Remuneration Committee chairs and remuneration managers will be busy, that’s for sure.
Louise Redmond, Director Law Debenture Governance Services
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