Listed Company Director Remuneration - Draft Legislation Published

United Kingdom

Following all the debate over the last year, the Department for Business, Innovation & Skills (BIS) has now produced all the draft legislation necessary to implement its final proposals for greater disclosure of, and shareholder control over, director pay in listed companies. (Please click here for our Law-Now on Vince Cable’s recent announcement, which also sets out the changes proposed since his earlier consultation paper).

Summary of new rules

To date, the annual directors’ remuneration report that listed companies have been required to publish has been subject only to an advisory shareholder vote – in other words, the vote has not had any binding effect.

The new rules will require a listed company each year to produce a new-style implementation report (containing much more information than currently required in a remuneration report) on pay in the previous year and to hold an advisory vote on that. However, at least every three years, the company will have to produce and hold a binding vote on a new-style policy report. The company will not be able to depart from its policy when remunerating its directors, whether in cash or shares or on termination of employment, for that and future years until shareholders change that policy or authorise a departure from it.

Application of the new rules

There is a lead-in time for the proposed provisions and they do not apply to all quoted companies.

The new rules will come into force only “after” October 2013, which appears to indicate that the first companies to be affected by the new rules will be companies with December 2013 year-ends. All listed companies therefore will have at least one more year under the current regime. The annual report produced in, say, April 2014 for a December 2013 year-end company will have to report remuneration paid in 2013 using a new style implementation report and also include a policy report. The 2014 AGM will have to include the advisory vote on the implementation report and the binding vote on the policy report.

Only the following companies are caught:

  • UK incorporated companies quoted on the Main Market of the London Stock Exchange (but not AIM companies); and
  • UK incorporated companies quoted on the New York Stock Exchange or NASDAQ or officially listed in another EEA member state.

Strictly, therefore, the new rules will not apply to non-UK incorporated companies listed on the Main Market (including companies that have redomiciled abroad), although such companies will almost inevitably be driven by their investors to adopt corresponding disclosure standards and approval processes. Many AIM companies might be in the same position.

There was hope that companies outside the FTSE 350 might escape the full rigour of these proposals, but this has not transpired.

New form of the directors’ remuneration report

As anticipated, the directors’ remuneration report will be split into two – a policy report, setting out current and future remuneration policy, which will be subject to a binding shareholder vote; and an implementation report, which will be subject to an advisory shareholder vote. Companies will also be required to include a letter from the chairman of the remuneration committee at the start of the remuneration report, summarising the key messages on remuneration and the decisions which have been taken. Many companies already do this.

Policy report

The policy report must be produced at least every three years. The policy report focuses on the pay policy for the current and future financial years and needs to be passed by a binding shareholder vote. All companies will have to put forward a resolution in the first year of operation of the legislation, which raises the rather strange prospect (if companies go to shareholders only as strictly required) of 2014, 2017 and 2020 (and so on) being the years in which the vast bulk of these votes will be held.

As stated above, once the policy has been approved the company can only make payments in compliance with the policy without special shareholder sanction. If a policy report is not passed, the previous report remains the governing policy until altered by shareholders.

The policy report must include the following:

  • A table setting out the key elements of remuneration and information about: how the policy supports the company’s short term and long term strategy; how each element operates and in particular whether it is subject to clawback (where shares or cash previously awarded are recovered from the director) or malus (where, rather than clawing back previous amounts awarded, unvested deferred remuneration is reduced). Clawback/malus are not themselves made compulsory components of a pay package, however, although they are emerging best practice and there is to be a consultation on amending the Corporate Governance Code to cover these arrangements; the maximum potential value of the award; the performance criteria and performance period; and what decisions have been taken in relation to the remuneration and why.

The table should also be accompanied by an
explanation of whether, and why, the policy for
directors differs from that for other employees.

  • Information on contractual arrangements in directors’ service contracts which relate to remuneration.
  • A graphical representation of the amount of remuneration under each element that directors will receive if performance is above, at or below target.
  • Exit payments – companies will need to summarise their approach to termination payments and, in particular, how each element of pay will be dealt with when calculating the termination payment, whether there is a distinction between good leavers and bad leavers and how performance will be taken into account.
  • Material factors which have been taken into account when setting the pay policy. In particular, the report will need to include an explanation of the pay policy for the group as a whole and how this has been taken into account, whether (and how) employees’ views on remuneration policy were sought and how shareholder views were taken into account (a far departure from an early proposal for an employee representative on the remuneration committee).

Where the policy report is not produced for a particular year, shareholders should be informed of where they can obtain the last policy report approved by shareholders, which will normally be on the company’s website. However, it is difficult to see companies not including their policy report in each annual report (even if approval is not formally required), since otherwise cross-referencing will become very difficult.

Implementation report

The implementation report – which, in contrast to the policy report, must be produced/updated each year and will be subject to an annual advisory only vote - will explain how the pay policy has been implemented for the previous year. It will include:

  • A single figure of remuneration for each director. To ensure consistency in how this is calculated, the consultation paper sets out BIS’s proposed methodology. In particular, LTIP awards should be taken into account using the share value at vesting.
  • Information about the performance conditions for annual bonuses and LTIPs and how the company performed against those targets.
  • Termination payments – details of how termination payments were calculated and how they relate back to the company’s previously published policy on exit payments.
  • Details of LTIP awards granted during the year, including performance conditions and potential levels of award if targets are met.
  • Details of the total shareholdings of directors.
  • A chart comparing company performance (using total shareholder return as an indicator of performance) and CEO pay.
  • Greater information about the role of remuneration consultants.
  • Details of how shareholders voted on the policy report and implementation report at the previous AGM, the percentage of abstentions, reasons for significant dissent (if known) – which may be particularly difficult to condense when shareholders often have divergent views – and any action taken by the remuneration committee in response.

In addition, companies will have to announce details of directors’ termination packages after their departure, though the exact timings of this are unclear.

Breach of rules?

Pay and benefits made in breach of the legislation will be recoverable either from the receiving director or from the directors who authorised the relevant payments.

In an unexpected departure, however, there will be some “grandfathering”. Certain payments made under an agreement dated before 27 June 2012 will not be caught by these requirements even if they are inconsistent with current policy unless they were amended after that date – though there appears to be some special disclosure requirements for “offending” agreements.

There are a number of uncertainties, in particular in relation to the grandfathering. For example, where the payment is subject to the board’s discretion, is the payment grandfathered (because it was in the agreement before 27 June 2012) or subject to the new rules (because the discretion was exercised after that date)? The provisions also appear to be poorly drafted, in that they capture payments and benefits but not in all cases the share plan awards (whether options or LTIPs) that are surely also intended to be captured.

It seems likely therefore that further amendments will have to be made as the legislation progresses through Parliament.


The legislation is now in probably virtually final form as far as the companies which are affected and the broad details of disclosure are concerned. Further details, though, are likely to emerge. No immediate action is needed, but companies will in due course need to review existing arrangements in the light of the final legislation.

The challenge for companies going forward will be to draw up a policy that complies with the legislation and is commercially flexible enough not to be changed in the next three years without good reason, but is not so vague or undemanding as to be at risk of being voted down by shareholders.

Indeed, BIS recommends that guidance is developed before the new rules take effect on the level of detail and type of information that should be reported in the remuneration report and that this should be agreed by business and investors respectively. Given that the regulations are much less prescriptive than had been feared, much depends on what investor groups will say. Their views on what they actually expect companies to say will therefore be eagerly awaited - although they may not be formally published, and practice will only emerge through individual experience and consultation.

Further reading

A copy of the consultation paper, which contains the draft regulations on disclosure, is available here. The proposed legislation on the binding shareholder vote and the consequences for remuneration paid in defiance of the policy report passed by shareholders is contained in proposed clauses for the Enterprise and Regulatory Reform Bill, which can be found here.

Comments are invited on the disclosure regulations until 26 September 2012, but there is no formal consultation process on the proposed clauses for the Enterprise and Regulatory Reform Bill. The Government has moved straight to Parliamentary proposals, which is unfortunate given that the legislation clearly still needs a significant amount of amendment.