The reforms require these companies, amongst other things, to set out how the pay awarded to their chief executive compares to that of representative UK employees, with related explanations and disclosures. Specifically, the pay ratio regulations require the companies to disclose and explain the ratio of their chief executive's total pay over a financial year to the median and 25% and 75% interquartile threshold total pay of the company's UK employees for the same financial year.
The same companies will also need to show what effect a substantial increase in share prices over the vesting period would have on the value that executives could realise from any new long-term incentive awards. Along with many other large UK companies, they will also need to report on how their directors took into account employee and other stakeholder interests when making decisions during the relevant financial year
The legislation applies to UK quoted companies with over 250 UK-based employees. In this context, 'quoted companies' are UK-incorporated companies with shares either included on the UK Official List, and therefore also traded on the London Stock Exchange Main Market, or on any other UK regulated market, or listed or admitted to trading on any non-UK EU or EEA regulated market, the New York Stock Exchange or NASDAQ. The first affected reporting period for each company will be their first financial year commencing on or after 1 January 2019, although the statutory disclosures relating to that financial year will not need to be made until 2020, in the directors' remuneration reports already required to be presented by the relevant companies to their shareholders.
Remuneration and incentives expert Lynette Jacobs of Pinsent Masons, the law firm behind Out-Law.com, said: "Amongst FTSE equity-listed companies strictly only the UK-incorporated companies will fall within the scope of the new pay ratios disclosures, but it is likely that non-UK incorporated FTSE companies will also voluntarily comply. To date, these companies have generally closely followed the Companies Act 2006 quoted companies directors' remuneration governance and reporting requirements so far as they can, and these latest regulations simply add pay ratios and a few other features to that regime."
"These new directors' remuneration requirements for quoted public companies form part of a substantial package of corporate governance reforms, some parts of which are also mainly relevant to FTSE equity-listed companies, for example the revised UK Corporate Governance Code. Other parts of the reform package apply to other large UK-incorporated companies, as well as to quoted companies," she said.
"Directors of affected companies will need to consider and tailor their companies' approaches to the applicable reforms, and they are likely to find this easiest to do if they take a holistic approach where appropriate, rather than addressing each new requirement in isolation. The reform package contains a number of different elements all broadly relevant to employees and the broader workforce, including the new pay ratios requirements, and this sub-set of the reforms in particular will call for a holistic approach to compliance," Jacobs said.
Jacobs cited two reasons why affected companies should start to consider how they will implement the reforms well in advance of the "seemingly remote" 2020 corporate reporting and AGM season.
"Firstly, although the first corporate reports subject to the new requirements will not be due to be presented to shareholders for some time, those reports will deal with the activities and conduct of the relevant company from the very beginning of the first financial period to commence on or after 1 January 2019," Jacobs said. "Secondly, there may be strong expectations of early adoption, and also potential gains for companies from early adoption. That is certainly the case for the new pay ratios disclosure requirements, which the influential Investment Association Principles of Remuneration strongly encourage FTSE companies to adopt in their reports and accounts to be presented during the 2019 AGM season - this year."
UK business secretary Greg Clark said: "The regulations coming into force today will build on our reputation by increasing transparency and boosting accountability at the highest level - giving workers a stronger dialogue and voice in the boardroom and ensuring businesses are accountable for their executive pay. These new regulations are a key part of the wider package of corporate governance upgrades we are bringing forward as a government to help build a stronger, fairer economy that works for businesses and workers."
The new reporting obligations complement requirements set out in the new Corporate Governance Code relating to executive remuneration as well as influential institutional investor guidelines set by the Investment Association.