Companies will welcome revised directors' remuneration rules, says expert

Share plans and remuneration  expert Matthew Findley of Pinsent Masons, the law firm behind Out-Law.com, said that companies would welcome the updated draft regulations, a copy of which has been circulated to companies and advisers by the Department of Business, Innovation and Skills (BIS) ahead of Parliamentary approval. The new regime is intended to apply to companies with financial years beginning on 1 October 2013 onwards.

"The requirement to disclose performance conditions on a forward-looking basis has been considerably watered down," said Findley. "This will be welcomed by businesses as it was going to provide a significant challenge. It could also have led companies towards an annual policy vote, something which both the ABI and BIS were keen to avoid. It is not, therefore, surprising that changes have been made."

"The fact that companies will now not have to disclose performance targets or outcomes, prospectively or retrospectively, if the information is 'commercially sensitive' is helpful. There may, however, be a tension between the desire of companies to maintain confidentiality and the desire of shareholders to fully understand the link between pay and performance," 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 take effect, 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 implementation report must include details of actual payments made by the company, set out as a single figure for the total pay directors received in the year. Companies will be able to provide additional information about how this figure was calculated, both as part of the single figure remuneration table and elsewhere in the report. Payments to former directors must also be included.

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, and what performance measures will be applied. Each element should include a maximum potential value, however under the latest draft of the regulations this may now be expressed as a percentage of salary. It will no longer be necessary for employers to set out a maximum potential value for salary or other fixed pay, or when describing the company's policy on buy-out awards.

Incentives expert Matthew Findley said that this change would impact on "how companies approach equity awards".

"Companies will no longer be able to use the existing flexibility contained in the Listing Rules to grant equity awards above normal limits without shareholder approval," he said.