Executive remuneration – new votes and disclosures
12 July 2012
The government has announced measures on
executive remuneration which are intended to "strengthen the hand
of shareholders to challenge excessive pay whilst not imposing
unnecessary regulatory burdens". This article examines the three
key developments, and the timetable and implementation process for
the reforms. Links to the relevant announcements and consultations
are given at the bottom.
Impact and timing
The proposals apply to UK-incorporated "quoted
companies", being those whose equity shares are listed on the
London main market, the official list of another EEA state, or on
the Nasdaq / New York exchanges. They do not apply to
UK-incorporated companies on the AIM Market of London Stock
Exchange plc, though developing market practice will no doubt be
monitored closely by all major companies, advisers and
It is anticipated that the legislative changes
will come into force from October 2013 (though the timetable is not
yet altogether certain, see below).
The three key
(1) Binding vote on
Shareholders are to be given a binding vote on
a forward-looking remuneration policy at least every three years,
and potentially more frequently if the company seeks to change its
policy within that period.
Approval of a new policy will require the
support of a simple majority of members voting on the resolution
and not, as had been mooted, a higher threshold (possibly 65%). If
a new policy is not approved, the company will either have to
convene an EGM to put forward a revised version, or wait until the
next AGM and continue to comply with the existing policy in the
A replacement schedule to the main accounts
regulations (SI 2008/410, the "accounts
regulations") will set out the reporting requirements for
the policy, and a draft is being consulted upon. The government
intends this to include a table specifying key elements of pay and
supporting information, and differing scenarios for directors' pay
in relation to financial targets.
(2) Advisory vote on
implementation of remuneration policy
The amended accounts regulations will also
prescribe the contents of a report on the implementation of the
remuneration policy over the preceding financial year, including
stating a single figure for the total compensation of each
The current annual advisory vote on the
remuneration report as a whole will be retained for the
implementation report, and if it is not passed by a simple majority
then a binding vote on the remuneration policy will be triggered
for the following year. The logic of this is questionable since it
may be the implementation and not the policy itself which gives
rise to shareholder concerns, and this right might even be used to
raise unrelated concerns.
It is also proposed that a company should
issue a statement to the market as to how it proposes to address
shareholders' concerns where a substantial minority vote against
the advisory resolution - the Financial Reporting Council
("FRC") is consulting on this alongside other
potential changes to the UK Corporate Governance Code.
(3) Exit payments
The remuneration policy will identify the
principles for future exit payments for directors, including
whether the company distinguishes between different circumstances
of leaving (such as retirement or on a change of control). The
implementation report will state the company's actual practice in
the preceding year.
Whenever a director leaves, the company will
be required to publish a prompt statement setting out what exit
payments that director has received, and shareholders will no
longer have to wait until publication of the annual report and
All of this represents a major departure from
the initial government proposal that any exit payment exceeding the
equivalent of one year's base salary would need to be approved by a
separate shareholder resolution. Exit payments will instead be
brought within both the binding and advisory votes.
Various important points are still to be
resolved or fully explained, including:
- how precisely the timing will operate for a new remuneration
policy given that most AGMs are held 4 or 5 months into a financial
- whether directors' service contracts will have to be amended
individually to comply with the new regime, or if existing
contractual rights will be preserved until these expire; and
- how the single figure for a director's total pay is to be
calculated to allow for meaningful comparisons across companies -
the government consultation favours a methodology developed by the
FRC's Financial Report Lab, but invites comments.
A draft Enterprise and Regulatory Reform Bill
was published in May, but further detail is awaited. Currently,
this draft merely removes from the Companies Act 2006 the clause
preventing a person's entitlement to remuneration being conditional
on the (advisory) vote on the directors' remuneration report, but
this will not of itself introduce a binding vote. Substantive
provisions are now being put forward for consideration at the
committee stages, but are likely to change during the parliamentary
process and we can report on the outcome in due course.
The consultation on the accounts regulations
closes on 26 September 2012. The government believes that the
amended regulations should be supplemented by guidance on the
detail and type of information to be reported agreed between
businesses and investor communities. Changes are also required to
the Listing Rules, which currently provide for flexibility with
long-term incentive schemes for directors.
A central justification for reform is that the
current advisory vote has not proved effective. Interestingly, the
current AGM season has shown a much greater willingness by
shareholders to challenge executive remuneration, with significant
adverse votes for the likes of WPP, Aviva, Trinity Mirror and
Whether due to this or representations made on
behalf of quoted companies, the final proposals have been
simplified and diluted - particularly in relation to exit payments.
The government is seeking to tread the fine line of empowering
shareholders while avoiding the micro-management of companies.
Nevertheless, this package of reforms
represents a very significant development, and quoted companies
will have to review their remuneration strategies and amend their
AGM documentation in readiness for October 2013.
- March 2012 shareholder voting rights
- Enterprise and Regulatory Reform
Bill and related materials
- June 2012 revised remuneration reporting
Daniel Hooke is a
Senior Associate (PSL) in the Corporate Group of
Field Fisher Waterhouse LLP in London.