The Department of Business, Innovation and Skills today published the draft regulations that will implement the Government’s plans to reform the pay of quoted company directors. The regulations are contained in this consultation document. The accompanying BIS press releases are here and here.
BIS announced its plans for quoted company directors’ pay reforms on 20 June 2012, as we covered in this post.
The regulations (which will be called ”The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2012″) will put in place the proposed changes to the existing remuneration report regime. The remuneration report will be split into two:
- a forward-looking policy report, which will be subject to a new binding shareholder vote, and
- a report on how the policy was implemented, which will be subject to an annual advisory vote.
Note, 4 July 2012: The shareholder binding vote on directors’ pay will be introduced via the Enterprise and Regulatory Reform Bill which is currently going through Parliament. The proposed amendments that the ERR Bill will make to the Companies Act 2006 to introduce that binding vote are here. Those amendments state that if a payment to a director (including a loss of office payment) is made in contravention of an approved remuneration policy, then the recipient must hold the payment on trust for the company and any director who authorised the payment is jointly and severally liable to indemnify the company for any loss resulting from it. See proposed new sections 226B, C and E of the CA2006. The provisions requiring payments to be approved by shareholders will not apply to remuneration payments or payments for loss of office that are required to be made under an agreement entered into before 27 June 2012. The BIS explanatory notes for these ERR Bill amendments are here.
From the principal BIS press release:
The Government today 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 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 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.
Business Secretary Vince Cable said:
“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.”
The consultation closes on 26 September 2012 and the reforms are expected to be in force from October 2013.
UPDATE 10 October 2012: The GC100′s response to this consultation is here.