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
The UK government proposes changes to make the policy report subject to an annual binding shareholder vote every three years or where the policy is changing. 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.
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.
Draft legislation is currently making its passage through Parliament. The latest proposal seems to strike a good balance between giving shareholders more influence on executive pay and avoiding shareholders micromanaging the companies into which they invest.
We expect the proposed requirement to publish a single figure for each director’s remuneration will increase transparency and induce remuneration packages to be less complex, more closely align directors’ pay and performance and will also enable investors to more readily compare and evaluate remuneration packages across companies.