UK: Remuneration - Directors' remuneration reports

Jemima Coleman and Ruth Liddicoat explain how the new regime for disclosure and shareholder approval of directors' remuneration will affect employment lawyers in this article, first published in ELA briefing November 2013.

Overview

The amended DRR and CA provisions came into force on 1 October 2013 and apply to remuneration payments to both executive and non-executive directors of all UK-incorporated quoted companies. A ‘quoted company’ is defined as a company with shares listed on the Official List, officially listed in an EEA member state or admitted to dealing on the New York Stock Exchange or NASDAQ.

The changes are part of the Government’s package of reforms to address the perceived disconnect between levels of pay for directors and the performance of their companies. Average pay for FTSE 100 chief executives has risen by more than 300% in the past 15 years, from approximately £1 million in 1998 to £4.1 million in 2013, whilst share prices have only risen by about 10% in the same period (2013 Remuneration Survey).

There is a new obligation to publish a Directors’ Remuneration Policy, setting out the company’s forwardlooking policy on remuneration and potential payments (including its approach to recruitment and payments for loss of office). The Policy is subject to a binding shareholder vote at least once every three years. There is also expanded content and a prescribed tabular format for disclosure of the Annual Report on Remuneration. This should explain how the company’s Policy has been implemented in the previous financial year, including a single total figure of remuneration for each director, details of pension entitlement, incentive awards and share interests. Actual pay earned rather than potential pay should be disclosed. The Report is subject to an annual advisory vote by shareholders at the AGM.

This article sets out some of the requirements of particular relevance to employment lawyers, should they be involved in drafting or reviewing sections of a company’s Policy and/or Report. In particular, employment lawyers need to be aware that any contractual provisions that provide for payments to be made to the directors will, subject to transitional provisions, have to be: (i) covered by the Policy (and therefore subject to shareholder approval); (ii) amended to become consistent with the Policy; or (iii) separately approved by shareholder resolution. In drafting a company’s Policy, regard should also be given to the FCA’s Remuneration Code, if applicable.

Timing and transitional arrangements

The new regime does not apply to remuneration or loss of office payments made by a company before the earlier of:

• the end of the first financial year of the company to begin on or after 1 October 2013 and
• the date from which the first Policy takes effect.

The first companies to be affected are those with a 30 September year end, in respect of which the Report must be in the new format and the Policy put to a binding shareholder resolution at the AGM in early 2014. The Policy must come into force by 1 October 2014 at the latest; all remuneration and loss of office payments made after the Policy comes into force must be consistent with the Policy or approved by a separate shareholder resolution. For December year-end companies, the long-stop date by which the first Policy must be approved by shareholders is 31 December 2014.

Any remuneration (ie any form of payment or other benefit made to a current, prospective or former director, other than a payment for loss of office) or loss of office payments required to be made under an agreement entered into before 27 June 2012, which has not been modified or renewed since, fall outside the scope of the new regime. There is no definition of ‘modified or renewed’. Although an increase in salary would not normally constitute a variation of contract, it could constitute a modification. There will not be many directors, we suspect, whose contracts will not have been modified at all since 27 June 2012 by the time that the relevant Policy comes into effect.

Existing arrangements

Companies should carry out a detailed review of directors’ and former directors’ contracts and exit arrangements, including checking on a case-by-case basis whether any agreements entered into prior to 27 June 2012 have been modified since that date. As mentioned above, payments made under contracts entered into or modified after 27 June 2012 will have to be covered by/consistent with the Policy or else separately approved by shareholder resolution. This will include any old share schemes or bonus policies that are still paying out.

The GC100 guidance recognises that companies will want to ensure, by making it clear in the Policy, that any commitments made prior to the new regime coming into force can be honoured and suggests that investors are likely to find this acceptable in straightforward cases. In less straightforward cases, companies may wish to consider providing additional information and potentially consulting with investors before presenting the Policy.

Annual Report on Remuneration

Disclosures in relation to payments to past directors and payments for loss of office are of particular relevance to employment lawyers.

Payments to past directors include payments of money or other assets over the relevant financial year to any person who was not a director of the company at the time the payment was made, but who had been a director before that time, but excludes payments:

• for loss of office (which are dealt with separately)
• shown in the single total figure of remuneration for each director, or previously disclosed
• below a de minimis threshold set by the company and stated in the report
• by way of regular pension benefits commenced in a previous year
• in respect of employment or other contractual service for the company other than as a director. (Reg 15 DRR)

Although DRR does not require disclosure of consultancy fees to a former director, Listing Rule 9.8.8R2(c) is wider than DRR and currently requires disclosure of ‘any significant payments’ to former directors during the year being reported on. Whether or not the payment is significant should be determined by reference to whether it is significant to the director. In some cases the arrangement could also constitute a related-party transaction, which must be separately disclosed. Note that the FCA is consulting on the Listing Rule requirements to avoid unnecessary overlap with the DRR and proposes deleting Listing Rule 9.8.8R(2)(c) (Consultation Paper CP13/7 August 2013).

There are other considerations to bear in mind on a departure.

• Website disclosure: from 1 October 2013, in the event of a director leaving office, listed companies must issue a statement on their website setting out the director’s name and particulars of any remuneration or loss of office payment made or to be made after he ceases to be a director. The statement must be published as soon as practicable after any payment has been agreed and kept available until the next Report is made available on the website. (S.81 of the ERRA inserts a new s.430(2B) CA.)
• Interaction with the Listing Rules: the disclosures required in the Report broadly duplicate the disclosures requirements for annual reports under the Listing Rules (LR 9.8.8). However, companies should consider separately whether any additional disclosures are required to comply with the Listing Rules. For example, pursuant to LR 9.6.11, a company is required to notify an RIS that a director will be leaving the board (and the FCA consultation on the Listing Rules mentioned above does not propose removing this requirement). It may not be practical, at that time, to release details of any termination arrangements. The GC100 guidance envisages that, at the point of the director leaving the company, a second  RIS announcement will be made providing investors with information on the loss of office and remuneration payments to be made to the departing director and an explanation of how these amounts have been calculated. Where a better estimate or a finalised figure is available by the time the Report is published, it would be advisable to explain the reasons for any differences between the figures.

(iv) employee pay and views

Employment lawyers may need to advise on the requirement to detail how employee pay was taken into account and whether and, if so, how employee views were sought. Given that there is no express requirement to consult with employees, it is perhaps unlikely that many companies will seek employee views on pay policy. But if a company does wish to seek employee views, consider how best this can be achieved, perhaps using an existing employee representative body or trade union. (Regs 38 and 39).

Consultation on UK Corporate Governance Code

In light of the DRR and amended CA provisions, the GC100 guidance and the FCA’s consultation on changes to the Listing Rules, the Financial Reporting Council has announced a consultation on whether the UK Corporate Governance Code should also be amended to address a number of potential issues relating to executive remuneration.

The FRC is consulting on three specific proposals: relating to claw-back arrangements, whether non-executive directors who are also executive directors in other companies should sit on the remuneration committee and actions companies might take if they fail to obtain a substantial majority in support of a resolution on remuneration. If any changes to the Code are ultimately proposed, they will be subject to consultation in the first quarter of 2014. The new Code would then apply to accounting periods beginning on or after 1 October 2014.