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The UK government’s new proposals on executive pay

The UK government’s new proposals on executive pay

The UK Government’s proposals on executive pay have changed slightly since we last reported on this topic in April this year. The new proposals published on 20 June 2012 which were widely reported in the financial press constitute a good compromise between giving shareholders more influence on executive pay and avoiding shareholders micromanaging their companies.

In April 2012 we reported that the directors’ remuneration report is proposed to be split into a forward and a backward-looking section with:

• the forward-looking section (referred to as the policy report) outlining the future remuneration policy and potential exit payments, and

• the backward-looking section (referred to as the implementation report) explaining how the remuneration policy was implemented in the previous financial year.

The policy report
Back in March 2012, the UK Department for Business Innovation & Skills (BIS) proposed that the policy report be made subject to an annual binding shareholder vote requiring a higher than 50% majority. The Government’s new proposal is that this section of the directors’ report be subject to an annual binding vote only if the company intends to change its remuneration policy. If no such change is suggested, a binding shareholder vote would only be required once every three years. The required majority for this vote now appears to be a simple 50% majority of shareholders rather than a majority of between 50 and 75% as was suggested earlier this year. If a company fails the binding vote it will be required to follow the existing remuneration policy until the shareholders approve a revised policy.

The implementation report
The backward-looking section of the directors’ report is currently subject to an advisory shareholder vote only and this is suggested to remain unchanged. If a company fails the advisory vote it will be required in the following year to seek the shareholders’ binding vote on its overall remuneration policy.

The implementation report will have to include a single figure of each director’s total remuneration. A methodology for calculating this single figure has been developed by BIS together with the Financial Reporting Council’s (FRC) Reporting Lab, companies and investors which “will reflect actual pay earned rather than potential pay awarded.”

Proposed changes to the UK Corporate Governance Code
Where a substantial minority of shareholders votes against the company’s remuneration policy or against its implementation, the company may be required to publish a statement setting out how it intends to address shareholder concerns. The FRC will consult on the necessary changes to the UK Corporate Governance Code to reflect this new requirement.

What next?
The Government is expected to publish amendments to the Enterprise and Regulatory Reform Bill shortly to reflect these proposals. BIS will also publish draft regulations setting out the format and content of the directors’ remuneration report.

These reforms are due to come into force in October 2013.

Comment
We welcome the new proposal of making the future remuneration policy and potential exit payments subject to a binding 50% majority vote every three years (unless such policy is due to be changed) rather than an annual supermajority vote. It strikes a good balance between giving shareholders more influence on executive pay and avoiding shareholders micromanaging their companies.

Although we have not yet seen the proposed methodology for how the single figure of each director’s remuneration shall be calculated, we expect the proposed requirement to publish such a single figure to increase transparency and induce remuneration packages to be less complex and more closely align director pay and performance. It will also enable investors to more readily compare and evaluate remuneration packages across companies.

Marlies Braun

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