The details of draft UK binding pay vote regulations are now available.
The draft UK regulations specify that the directors’ remuneration report is to contain two distinct parts:
· A policy report setting out all elements of a company’s remuneration policy on a forward-looking basis, and key factors that were taken into account in setting the policy. This part of the report will only be required when there is a shareholder vote on the policy.
· An implementation report, setting out details on how the remuneration policy was implemented in the past financial year, including actual payments to directors and details on the link between company performance and pay.
The remuneration policy must be approved by shareholders by way of an ordinary resolution (i.e. by a majority of the votes cast, as opposed to the 75% majority needed for support on the remuneration report vote in Australia) passed at least once every three years. If a proposed new remuneration policy is rejected by shareholders the company has to continue with the previous policy. The draft regulations do not specifically address the question of what happens if a previously-approved policy is rejected when renewed approval for the unchanged policy is sought after 3 years – presumably the same policy will continue to apply!
The consequences of going against shareholders’ requirements are, however, spelled out. An obligation to make a payment to an executive which is inconsistent with the approved directors’ Policy Statement and which has not been approved by a separate shareholder resolution has no effect. Moreover, if a payment is made in breach of the provisions, it is to be held by the recipient on trust for the company or the person who made the payment and, if the payment was made by the company, any director who authorised the payment will be jointly and severally liable to indemnify the company for any loss resulting from it. So the fact that Australian directors are liable for a company’s unpaid taxes and superannuation (see HERE) does not seem so bad relative to their UK cousins!
Once the remuneration policy is approved, the company will only be able to make payments within the limits it allows. The policy report will be required when shareholders have a binding vote on policy. The government proposes that the policy part of the report includes the information set out below. This replaces rather than adds to the current reporting requirements.
· A table setting out the key elements of pay and supporting information, including how each element supports the achievement of the company’s strategy, the potential value and performance metrics.
· Information on service contracts.
· Scenarios for what directors will get paid for performance that is above, on and below target.
· Information on the percentage change in profit, dividends and the overall spending on pay.
· The principles on which exit payments will be made.
· Material factors that have been taken into account when setting the pay policy, specifically employee pay and shareholder views.
The implementation report will facilitate the annual advisory vote on the actual payments made to directors. The government proposes the implementation report will include:
· A “single” total figure of remuneration for each director (see below).
· Detail of performance against metrics for long term incentives.
· Total pension entitlements (for defined benefit schemes).
· Exit payments made in year.
· Details on variable pay awarded in year.
· Total shareholdings of directors.
· A chart comparing company performance and CEO pay.
· Information about who has advised the remuneration committee.
· Shareholder context.
The so called “single” remuneration figure required has somehow morphed in the regulations into a table setting out for each director serving in the reported year a series of single aggregate figures relating to each pay element, as per the table below.
Salary and Fees
In respect of his/her “qualifying service” as a director.
This includes benefits-in-kind and any other miscellaneous receipts not otherwise covered such as cash dividends received in respect of any unvested LTIP awards.
Pension Related Benefits
(i) The contributions to or additional value achieved in the year from participation in money purchase and/or defined benefit schemes and (ii) any cash received in lieu of pension.
Money or other assets received
This covers short-term variable pay in the reporting period due to achievement of performance conditions that relate to that period, such as annual bonus received during the year.
Awards under long-term schemes
This covers (i) long-term awards which have vested as a result of achievement of performance for any period ending in the reported year and (ii) awards granted in the year if not subject to performance.
So much for a “single” figure. The way long-term plans are to be reported is also sure to confuse shareholders.
The new reporting and approval requirements will apply only to UK-incorporated companies on the Official List, or on any official list in a European Economic Area state, or on the NYSE or NASDAQ.
The government is currently engaged in consultation on the draft regulations to seek evidence on the impact, costs and benefits of the proposals as well as detailed views on whether the draft regulations will achieve the Government’s policy objectives. The BIS consultation paper and draft regulations are available HERE.
The amendments to the Companies Act 2006 that will give effect to the new shareholder voting rules on remuneration matters are contained in the Enterprise and Regulatory Reform Bill 2012, that was at the Committee stage of its passage through the House of Commons at the time of writing, having been introduced into the House on 23 May 2012 (the Bill, including amendments made to 18 July 2012, is available HERE).
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