New directors' remuneration reporting regime will come into force from October

The new regime comes into force on 1 October for quoted companies whose accounting period ends on 30 September. From this date, reports must contain more information about how directors have been and will be paid along with how this relates to company performance. This information can then be used by company shareholders when exercising their new legally-binding vote on the company's executive pay policy. The Government has now published final regulations governing the changes (24-page / 114KB PDF).

"The first companies to report under the new regime and seek binding shareholder authority for their remuneration policy are those whose accounting period ends on 30 September, but all companies within the new rules should now be planning ahead and identifying any issues that may require particular explanation and justification," said Judith Greaves, a share plans and incentives expert with Pinsent Masons, the law firm behind Out-Law.com.

"Careful thought will be needed in putting together the remuneration policy, including some elements that many companies would previously have dealt with only as and when they arose. For instance, the policy will need to include the approach to remuneration in the context of director appointments and terminations, even if none are in prospect," she said.

"If it transpired that the binding policy did not enable the right package to be delivered when unexpected circumstances arose, there would be a need to do back to shareholders specially in order to amend the policy. That would be an unwelcome complication, so companies will need to ensure there is sufficient flexibility within their shareholder authority," she said.

Proposed guidance from the GC100, anticipated to be published in September, should provide a "benchmark" of what will be expected of companies under the new regime, she said. The GC100 is the Association of General Counsel and Company Secretaries of the companies listed on the FTSE 100, and is working alongside investors to produce this guidance.

The final regulations remain unchanged from the draft published in June. Once in force, directors' remuneration reports will be split into two parts: a forward-looking pay policy report, which will be subject to the 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 are treated as having 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 companies not to publish certain commercially-sensitive information when disclosing performance targets or outcomes, although this would need to be explained.

In an explanatory note published alongside the new regulations (5-page / 24KB PDF), the Government said that they were part of its "drive to improve the long-term performance of UK companies by building on our already world leading corporate governance standards".

"Investors and businesses agree that the link between top pay and long term company performance needs to be re-established to mitigate against directors focusing on achieving short term goals, even when these are not in the long term interests of the company," it said. "In addition, as remuneration structures have become more complex it has become difficult and time consuming for investors to understand exactly what a director has been and could be paid."

"Taken together, these disclosures [introduced by the new regulations] will ensure that investors are clear about the potential size of directors' remuneration packages, how they align with performance and the extent to which the remuneration committee has considered the pay and conditions elsewhere in the company and the views of shareholders in setting the remuneration policy. They will inform investors in exercising the new voting powers introduced by the [Enterprise and Regulatory Reform Act]," it said.