Out-Law News 2 min. read

Remuneration disclosures improving among UK companies, research finds

New requirements introduced in the 2018 UK Corporate Governance Code have improved listed companies’ reporting on their executive remuneration policies and practices.

Research carried out for the Financial Reporting Council (FRC) showed that FTSE 350 companies have better aligned their board’s remuneration policy with long-term shareholder interests, and are disclosing more information about shareholder and workforce engagement than they did previously.

However, the researchers from the University of Portsmouth said many reports lack detail in how the provisions of the Code were being applied, and there was less evidence of engagement with the company's workforce than with its shareholders.

The research was designed to assess the impact of the policies and provisions relating to remuneration reporting introduced in the 2018 Code, which aimed to ensure that a company’s remuneration and workforce policies align with its long-term values and success, and that the setting of directors’ pay is done in the context of wider employee pay.

The study found (38 page / 1.42MB PDF) the new requirements had had a positive impact on corporate disclosures and the extent of disclosure increased in 2019 compared to 2017. FTSE 100 companies tended to adhere to Code requirements to a greater extent than their FTSE 250 counterparts.

Few companies, however, provided evidence that they did not reward poor performance, and AGM reports tended not to disclose the reasons for any shareholder dissent against remuneration policies. Most had less than 20% shareholder dissent over new remuneration policies and dissent was often related to company-specific issues.

Executive remuneration expert Fleur Benns of Pinsent Masons, the law firm behind Out-Law, said it was encouraging that many companies had made good progress in complying with the remuneration provisions of the Code.

“However, there is clearly a way to go. It is particularly concerning to see that while a number of companies reported risks that related to excessive awards, most companies failed to explain their plans to mitigate these risks. It’s clearly not enough to include a discretion in your variable remuneration plans to override formulaic outcomes; investors and executives want to have a clear understanding of when and how a remuneration committee will use this discretion,” Benns said.

The research found there had been a 177% increase between 2017 and 2019 in the number of companies developing a formal policy for post-employment shareholding requirements, and a 30% increase in the number which had a policy designed to align executive remuneration with a company’s purpose and values.

Institutional investor bodies such as the Investment Association are continuing to put pressure on companies to disclose the enforcement mechanisms they have put in place to ensure compliance.

A number of companies have come under scrutiny in recent weeks from shareholders with higher levels of dissent in respect of bonus and remuneration packages, particularly in cases where the company has accepted government support or loans during the Covid-19 crisis, although most resolutions have passed regardless.

“Many companies are going to have to do better if they want to ensure greater investor support for their directors’ remuneration report at their next AGM,” Benns said.

The researchers said further work in this area could assess the quality of the disclosures being made as well as the quantity, and examine the narrative disclosures around the reporting of AGM voting.

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