Directors' remuneration reports still too lengthy, says expert, as revised regulations published

Incentives expert Matthew Findley of Pinsent Masons, the law firm behind Out-Law.com, was commenting as the Government published a second draft of the regulations (19-page / 488KB PDF) following feedback from businesses. The new requirements are expected to take effect from October this year.

Companies will be required to set out the total amount paid to directors over the course of a year once the changes come into force as a single figure. However the revised regulations, which update the original draft published in June 2012, will allow companies to provide additional information about how the figure was calculated both as part of the single figure remuneration table and elsewhere in the remuneration report. The revised regulations also include a new requirement to disclose payments made to past directors over the relevant financial year.

"The proposed changes as regards the 'single figure of total remuneration' should provide some greater clarity but, while this is to be welcomed, there is little in the revised regulations which is likely to shorten a directors' remuneration report," Findley said. "Both companies and investors have – through the Financial Reporting Lab – expressed concern as to the length of directors' remuneration reports."

"They have also expressed continued concern about the need for Government to educate the users of such reports but, as yet, there is little sign of this happening. If the Government is committed to providing a sensible reporting framework then it should act on those concerns in order to avoid unnecessary and unhelpful disputes arising in future," he said.

Listed companies have been required to produce a directors' remuneration report as part of their annual reporting requirements since 2002, but the changes have been proposed in order to streamline the information that companies must disclose and clarify the link between pay and performance. Once the changes come into force, remuneration reports will be split into two parts: a forward-looking pay policy report, which will be subject to a binding shareholder vote, and a report on how that policy was implemented over the previous year.

The pay policy report must set out every element of pay that a director could be entitled to, including any entitlement to an exit payment, along with the maximum value of any payments and what performance measures will be applied. The additional report on how the pay policy was implemented will include details of actual payments made by the company, set out as a single figure for the total pay directors received for the year. This figure will cover all remuneration including bonuses, long-term incentives and pension provision, and will be subject to an annual advisory vote by shareholders.

The new remuneration reports will also set out the percentage pay increase of the company's chief executive, and include a breakdown of the percentage of the company's profits spent on pay in general and particularly for directors. Both of these requirements have been moved from the policy part of the report to the implementation part in the new regulations.

Incentives expert Matthew Findley said that it was unclear from the new regulations whether amendments to directors' share awards would need to be disclosed in the reports, however he expected that the Government would clarify its "oversight" before the regulations were formally enacted. However he welcomed less burdensome disclosure requirements, which he said reflected recent recommendations from the Financial Reporting Lab, part of the Financial Reporting Council (FRC).

"It is pleasing that the Government appears to be listening to companies and investors about the types of disclosure they would find helpful," he said. "This is evidenced by the changes to the requirements in relation to performance graphs, which accept the recent recommendations of the Financial Reporting Lab."

"Companies are likely to welcome the softening of the disclosures required in relation to remuneration provisions contained in executive employment contracts as the original provisions would have been unduly burdensome," he said.