The Government yesterday published its finalised plans for giving shareholders in quoted companies* control over directors’ remuneration. The Department of Business, Innovation and Skills press release is here and its “Statement of government policy” is here.
BIS describes its proposed reforms as “the most comprehensive reforms of the framework for directors’ remuneration in a decade”. The reforms will be effected through the Enterprise and Regulatory Reform Bill. What BIS describes as “simplified” regulations setting out how companies must report directors’ pay will be published and consulted on. The government’s plan is that all these reforms will be enacted by October 2013.
Pay reforms: Government intentions
The policy objectives of the reforms are to:
• “restore a stronger, clearer link between pay and performance;
• reduce rewards for failure;
• promote better engagement between companies and shareholders;
• and, overall, empower shareholders to hold companies to account through binding votes”.
Pay reforms: Binding vote on pay policy
Companies will have to set out their proposed pay policy and put it to a shareholder vote by ordinary resolution. The policy will have to include potential payments and the performance measures that will be used, and policy on how exit payments will be calculated. Once the policy is approved by shareholders, companies will be required to act within the pay policy and will not be able to make payments outside the scope of that policy. BIS’s policy document sets out, at Table A, the detailed contents of this pay policy report.
This is a major change in how companies are run: control of quoted company director pay passes from management (the board) to shareholders.
The vote on the pay policy statement will take place annually unless a company decides to leave its pay policy unchanged, in which case the vote will happen at a minimum every three years. BIS’s intention is that this:
“will encourage companies to devise a policy for the long term, clearly linked to their strategy and will put downward pressure on pay ratcheting. If directors wish to change the company’s policy, they will need shareholder approval”.
Where a company fails the binding vote, it will have to continue using the existing policy until a revised policy is agreed. Where the vote is lost, a company can either convene a general meeting to put forward a revised policy, or wait until the next AGM to do so.
The Financial Reporting Council has announced that it will consult on potential changes to the UK Corporate Governance Code, with a view to requiring a company to publish a statement as to how it will address shareholder concerns where a substantial minority of shareholders oppose the pay policy statement.
Pay reforms: Advisory vote on pay implementation
The existing shareholder advisory vote on directors’ remuneration will continue, but will be amended so that shareholders vote by ordinary resolution on an “implementation report” that contains, amongst other matters, a single total figure of remuneration for each director. BIS’s policy document sets out, at Table B, the detailed contents of this implementation report
On the single figure, BIS is drawing on the work of the FRC’s Financial Reporting Lab, which has been working with quoted companies and investors to develop a methodology for how the single figure will be calculated:
“The proposed single figure will be comprehensive. It will cover all types of reward received by directors in the previous year including fixed and variable elements as well as pension provision… The Government recognises that, while there are a number of ways of calculating a single figure, it is important to have consistency between companies as to what is included in the figure and how it is calculated. 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; and long term incentives where the reporting year is the last financial year of the performance cycle”.
If a company loses this advisory vote, it will be required to put its overall pay policy back to shareholders for re-approval the following year. Again, the FRC will also be consulting on changes to the Code that, where, a substantial minority of shareholders vote against the advisory vote, a company should publish a statement saying what it will do to address shareholder concerns.
Pay reforms: Exit payments
A company’s approach to exit payments will have to be set out in the pay policy statement – and so will be subject to a binding vote and will bind the company in what it can pay to departing directors. When a director leaves, a company will have “promptly” have to publish a statement setting out exactly what the director has received. Exit payments will also be covered in the implementation report and subject to an advisory vote.
*Companies on the Official List, see section 385 Companies Act 2006.
Tracking the Enterprise and Regulatory Reform Bill – BIS sub-site