UK to require binding votes on future executive pay policy, including exit payments
22/06/2012
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The UK is to introduce a binding shareholder majority vote on future executive remuneration policies (including potential payments and the performance measures to be used and their policy on how exit payments are to be calculated).    

To encourage companies to devise a policy for the long-term, the vote will take place annually unless companies choose to leave their pay policy unchanged, in which case the vote will be required at a minimum every 3 years. Companies will not be able to make payments outside the scope of the approved pay policy.  Shareholder approval will be required if directors wish to change the company’s pay policy, with companies having the choice of waiting for the next AGM or convening an EGM to consider the revised policy.  A company will have to continue to use the existing pay policy if shareholders do not approve a revised policy.

An approved policy will apply to existing directors as well as any new hires during the life of the policy.

In contrast to Australian law, the UK law will therefore require UK listed companies disclose future remuneration policy.

Shareholders will continue to have an annual advisory majority vote on the implementation of pay policy, including the actual sums paid in the previous year. Required disclosures will include a single figure of remuneration, covering all types of reward received in the previous year, including fixed, variable and pension elements. If the advisory vote fails, a company will be required to put their overall pay policy back to shareholders for re-approval in a binding vote the following year.

The UK Financial Reporting Council (FRC) is to consult on potential changes to the Corporate Governance Code that would require companies to explain how they will respond when a substantial minority (as yet undefined) of shareholders votes against the pay policy. 

What the UK Government called the “most comprehensive reforms of the framework for directors’ remuneration in a decade” would address “failures in corporate governance” and “maintain recent activism” by shareholders, it said.

“At a time when the global economy remains fragile, it is neither sustainable nor justifiable to see directors’ pay rising at 10 per cent a year, while the performance of listed companies lags behind and many employees are having their pay cut or frozen” said Business Secretary Vince Cable. “I have been greatly encouraged by the ‘shareholder spring’ and I want to see that momentum sustained.” (See statement from the UK Minister HERE

The changes, which will be introduced as amendments to the Enterprise and Regulatory Reform Bill currently before the UK Parliament, should be in force by October next year, he said.

The reforms differ in significant respects from those proposed by the UK government during its consultation in March. The suggestion that more than majority support (up to 75%) should be required to approve pay policy has been dropped. A proposal that borrowed from Australian legislation and that would have required exit payments amounting to more than a director’s annual salary to be approved by a binding shareholder vote has also been dropped.

Obviously, the UK government did not think the way Australia has gone is the right way.

The UK will also require companies to disclose a single total remuneration figure. For variable pay elements, the single figure is to reflect actual pay earned rather than potential pay awarded. This includes full bonuses awarded for the reporting period.  The value of long-term incentives in the last financial year of the performance cycle would be included, rather than the grant date value.  This means the performance-related outcome for a 2012 equity award would be included in the ‘single figure’ for a director’s remuneration for 2015, and reported in 2015. The time lag may result in big apparent fluctuations in pay, which could be misleading and would also need to be explained.

It is expected that Australia will also introduce a requirement to disclose a single total remuneration figure.  However, if the Australian government follows CAMAC advice in this regard, it will be considerably more convoluted and complex than that in the UK, resulting in 3 different groups of numbers instead of the one in the UK (see HERE) . 

The UK reports will also explain whether companies have met their performance targets.  In addition, they will need to indicate how executive pay relates to the pay of the wider workforce.  However, this will not need to set out ratios of executive pay to average worker pay, as was originally mooted.

Of course, the UK policy has practical problems, not the least of which is the delay of up to a year before pay policy can be changed to meet new and emerging circumstances, unless the company has the time and resources to convene an earlier general meeting. 

More details can be found HERE.

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