UK: Reform of Directors' Remuneration: Revised Draft Regulations Published

A revised draft of the Directors' Remuneration Report Regulations has been circulated by BIS, inviting comments by 25 March 2013. This follows the government's formal consultation on directors' pay and remuneration reporting reform last June.  The final Regulations are due to be published in the spring and BIS promises an FAQ document shortly to help stakeholders.  This note summarises some key changes in the revised Regulations and highlights important points to note.  

Background

For financial years beginning on or after 1 October 2013, the Directors' Remuneration Report (DRR) will be divided into two parts: policy and implementation.

• The policy report will set out the company's forward-looking policy on remuneration including key factors that were taken into account in setting the policy and potential payments (including the approach to recruitment and exit payments).  This will be subject to a binding shareholder vote at least every three years.
• The implementation part of the DRR will set out the actual payments made to directors in the last financial year, and be put to an annual advisory shareholder vote.

The changes being made to the Companies Act 2006 to impose the new shareholder voting requirements are set out in the Enterprise and Regulatory Reform Bill currently going through Parliament.

Key changes in the revised version of the Regulations are set out below.  Overall, there are significant improvements on the first draft, although some new requirements have also been added.

General

• Where the directors' policy is not being put to a vote, a new requirement to set out in the DRR information on when the policy was approved and where on the company's website, or other place, it can be inspected by members of the company.
• In relation to transitional arrangements, the provision that stated: "The directors' remuneration report must identify the date of commencement of the financial year or other date on which it is intended that this part of the report shall take effect" has been removed from the Regulations.  There is some uncertainty as to whether the policy report has to take effect immediately on approval.
• More detail is provided on the content of the statement from the chair of the Remuneration Committee: it must contain key messages, the context in which decisions have been taken and major changes during the year.
• Confirmation that companies can separately report on executive and non-executive directors (this makes sense and is in line with current practice).
• Clarification on which provisions of the report must be audited.
• A new request to state how the remuneration committee has satisfied itself that the advice of any remuneration consultants was objective and independent.

Implementation report

• In relation to the single total figure of remuneration for each director: 
  • flexibility to include additional columns;
  • clawbacks during the year can be shown as a negative figure in a separate column and deducted from the total (with a note as to the reason for the reduction and how it was calculated);
  • confirmation that where estimates are used, the actual figure should be included in the next report;
  • each column must also contain the figure set out in the report in the preceding  financial year;
  • LTIPs whose performance ends at "or shortly after" the end of the relevant reporting period, must be included, ie there must be an estimate of vesting, to reflect the FRC Financial Reporting Lab's recent report; and
  • dividends (and dividend equivalents) on LTIPs to be shown in the LTIP column rather than  the benefits column.
• A statement of performance targets for the current year where these were not contained in a previous policy report and the company chooses not to put the policy to a vote in the current year.
• More detail required in relation to loss of office payments made for each person who was a director at any time during that year, or previous years: the total amount of any payment for loss of office, an explanation of how each element was calculated, any other payment paid to or receivable in connection with termination, including outstanding incentive awards that vest on or following termination and, where a discretion was exercised, an explanation of how it was exercised.
• Further details of directors' shareholdings and share interests:an additional disclosure of any share scheme interests not included in the total remuneration figure (eg those which are neither awarded nor vest in the year being reported on) and unexercised share options. Plus confirmation that it is shares that are beneficially, rather than legally, owned. 
• The CEO pay graph has been dropped in favour of the current 5 year (rising to 9 year) TSR graph (as recommended by the Financial Reporting Lab).
• Some disclosures have moved from the policy report to the implementation report:
  • relative importance of spend on pay against profit, dividend and overall expenditure will now be in the implementation report (which is more accurate); this has also been changed to include tax paid in that financial year; and
  • percentage increase of CEO total remuneration to be included as a comparator against all employees of the company taken as a whole.

Policy report

• Confirmation that provisions which are still to apply pursuant to a previous policy report must be specifically mentioned when a new policy is put to a vote.
• More disclosure is required on performance targets, provided that disclosure is not seriously prejudicial to the interests of the company. 
• There is a discrete regime for new recruits, and it is now clear that the policy table does not apply to them which is helpful. Companies must set out a principles-based approach to remuneration for new directors.  This includes the maximum value (expressed as a percentage of the current highest paid director's salary) for salary, and the approach to other elements giving companies more flexibility in relation to recruitment/buy-out bonuses.
• A new requirement in relation to "Loss of office payment policy" to state how the circumstances under which a director leaves are considered and how his performance during his period of service is to be taken into account.

For more information please contact Jemima Coleman or Paul Ellerman.