New directors' pay reporting requirements on course for October as final regulations published

New regulations will require the around 900 companies listed on the main market to disclose more information about how directors have been and will be paid along with how this relates to company performance (21-page / 217KB PDF). This information can then be used by company shareholders when exercising a new legally-binding vote on the company's executive pay policy.

"For too long the pay of some directors has been out of sync with the performance of their company," said Business Minister Jo Swinson. "While we have started to see shareholders become more engaged, with last year's 'shareholder spring' a prime example, previously when they raised their voices with concerns they were not always listened to."

"This is why we made a number of reforms to address this, giving shareholders the clear information and robust tools they need to take action. Our changes will help to create the right environment for responsible, long-term, private sector growth, which will in turn support a stronger economy and a fairer society," she said.

Incentives expert Matthew Findley of Pinsent Masons, the law firm behind Out-Law.com, said that the new regime would "bring considerable focus" on levels of disclosure. However, "some uncertainty" remained regarding the level of detail that companies would be required to include, he said.

"That uncertainty will remain until the GC100 and the various investor bodies issue the guidance that has been promised on these issues," he said.

"Companies will be pleased that the final form regulations are now available. This will provide the certainty required to allow them to start planning properly for the next AGM season. Beyond that, it remains to be seen whether the EU's proposed 'say on pay' legislation – the Shareholder Rights Directive – will lead to further change," he said.

The new regime will apply to companies with financial years beginning on 1 October 2013 onwards. From this date, directors' 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, which will be subject to an advisory vote.

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 forward-looking 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, which may be expressed as a percentage of salary. Changes introduced since the first draft of the regulations will allow employers not to publish certain commercially-sensitive information when disclosing performance targets or outcomes.

"The crucial point companies need to keep in mind in undertaking the not insignificant task of conforming their directors' remuneration report to the new regime is that they will need to focus much more on justifying pay rather than simply reporting it," said incentives expert Matthew Findley. "This will include explaining very clearly to investors how pay structures link to strategy, performance and, in some cases, wider social responsibility."