UK: Executive remuneration- government proposals

On 20 June, the Government announced its revised proposals for executive remuneration reform, discussed in our earlier post. One week later it issued further details on its proposals, including drafts of the statutory provisions.

The reforms will apply to UK quoted companies, so will catch listed companies trading on the Main Market but will not apply to AIM companies. Under the reforms, there will be binding votes and advisory votes on directors' pay.

• Binding vote: A listed company will need to submit its future remuneration policy to shareholder approval (requiring a 50% majority) prior to the implementation of the policy. The policy will need to be put to a binding shareholder vote every year, if the policy changes. If the policy remains unchanged, then it will only need to be voted on by shareholders every three years. Once the policy is approved, the company will not be able to make payments which fall outside of the policy without shareholder approval (and this includes any exit payments to be made to a departing director). If the policy is not approved, the company will need to continue to use its existing policy until a new policy is approved by the shareholders;
• Advisory vote: A listed company will also need to seek shareholder approval for how the company has implemented its pay policy over the last year. As is currently the position under the Companies Act, the vote on the implementation of the policy will be on an advisory basis but if the advisory vote is not passed, then this will trigger a requirement for the company to seek shareholder approval of its remuneration policy in a binding vote the following year. 

The reforms will require changes to the Companies Act and new Regulations to set out the disclosure requirements for directors' remuneration reports (which will replace the existing reporting requirements).

The Government has announced that any obligations to make payments to directors which are contained in contracts entered into, amended or renewed after 27 June 2012 (the date the amendments to the Bill were announced) will need to comply with the new requirements when these new requirements come into force and the payments are made. So the proposals need to be taken into account for any new directors' contracts, or when making amendments to, or renewing, directors' contracts from now on. This applies to both service contracts and non-executive appointment letters. It will need to be made clear that the obligations to make any payments or provide any benefits are subject to the requirements in relation to the approval of remuneration policy in the future.

The Government is proposing that the revised reporting requirements will apply to financial years ending after October 2013. Under the amendments tabled to the Enterprise and Regulatory Reform Bill, companies with a 31 December year-end will need to have their policy reports approved by shareholders by 31 December 2014.

The Financial Reporting Council has announced that, once the Government's changes relating to executive remuneration have been finalised, it will consult on linked changes to the Corporate Governance Code.

We have prepared a detailed briefing on the proposed reforms, in which we highlight some potential issues in practice and the transitional arrangements which the Government is proposing in relation to existing remuneration agreements. To request a copy please click here.