Out-Law News 2 min. read

Government sets out what companies must disclose in executive pay reports


Companies will have to set out the total amount paid to directors over the course of a year as part of their annual reports under new rules on executive pay proposed by the Government.

Remuneration reports will also be split into two parts under the draft regulations (54-page / 472KB PDF), which are intended to "streamline" the information companies must disclose and clarify the link between pay and performance. A new pay policy report will, as previously announced, be subject to a binding shareholder vote while companies will also have to publish a report on how that policy was implemented over the previous year.

In addition, the remuneration report must contain a statement by the chairman of the remuneration committee summarising the report's contents. This will, the Government said "further improve transparency and make it easier for shareholders to quickly find the key information on pay within a report".

The new rules will "significantly improve" company reports, which have become "increasingly complex without giving shareholders the information they need", according to Business Secretary Vince Cable. Listed companies have been required to produce a directors' remuneration report since 2002.

"For the first time companies will be required to set out every element of pay that a director could be entitled to and how it supports long-term company strategy and performance," Cable said. "If the policy isn't specific enough, shareholders will have a legally binding vote they can use to reject it. I expect shareholders to use this new framework to maintain recent activism and challenge companies to inject greater pay discipline and prevent rewards for failure."

Forcing companies to "clearly disclose" directors' pay in a single figure would make it impossible for companies to mask what their executives were actually earning, he added.

However tax law and employee incentives expert Judith Greaves of Pinsent Masons, the law firm behind Out-Law.com, said that without accompanying disclosures the single figure requirement would be meaningless.

"The requirement to state remuneration as a single composite figure may lead to particular sensitivities – in relation to share incentives, for example, it will factor in the result of performance metrics set three or more years earlier, which could lead to distortion," she said. "The accompanying disclosures will be key to understanding particular numbers."

The changes are anticipated to come into effect from October 2013, alongside changes in the law which will introduce a binding shareholder vote on the pay policy report.

Once the forward-looking policy report has been approved by shareholders, companies will only be able to make payments within the limits specified, according to the regulations. The 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 report must also show how each element of the pay policy supports the company's objectives.

The report must also set out factors the company has taken into account when deciding on pay policy, including the views of employees and how the percentage pay increase given to the workforce that year relates to the percentage pay increase of the company's chief executive. However, companies will not have to disclose the relationship between the chief executive's pay and the average earnings of the workforce - a disclosure which was suggested during the Government's consultation on narrative reporting last year.

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.

This report will also include information on how well the company performed that year and what impact, if any, its performance had on pay. It will also specifically compare the chief executive's pay to company performance, and provide details on how shareholders voted on pay the previous year and any action the company took in response.

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