Directors' remuneration report
On 27 June 2012 the government published a consultation â entitled Directorsâ pay; revised remuneration reporting regulations â on the draft regulations determining what companies must disclose in pay reports.
The impact could be significant for a large number of companies, especially large and medium sized owner-managed businesses. The consultation highlights that this proposed change replaces rather than adds to the current reporting requirements.
The consultation on the draft regulations closes on 26 September and any changes to the regulations are expected to come into effect from October 2013.
Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410) sets out what companies are currently required to report on. The proposals set out in the consultation document will revoke and replace Schedule 8. Therefore small companies will not be affected.
The draft regulations provide that the remuneration report shall be in two parts:
A policy report
It will set out the companyâs forward looking policy on remuneration and potential payments. Once the policy is approved by shareholders, the company will only be able to make payments within the limits it allows. The proposal is that the policy part of the report includes the information set out below:
1. a table setting out the key elements of pay and supporting information, including how each element supports the achievement of the companyâs strategy, the potential value and performance metrics
2. information on service contracts
3. scenarios for what directors will get paid for performance that is above, on and below target
4. information on the percentage change in profit, dividends and the overall spend on pay
5. the principles on which exit payments will be made
6. material factors that have been taken into account when setting the pay policy, specifically employee pay and shareholder views.
The government proposes that for each element of pay, the table referred to in point 1 above will include the following information:
(a) purpose â how it supports the companyâs short and long term strategic objectives
(b) operation â summary of how each element of pay operates including whether claw back and malus are possible (malus is the withholding of deferred pay when performance is not sustained)
(c) opportunity â maximum potential value
(d) performance metrics â a summary of the performance metrics, the relative weighting of each, and the time period over which they are measured
(e) changes to policy â what decisions the committee has made about that element of pay for the future and why.
In order to put these disclosures in context, it is envisaged in the consultation that the policy table is accompanied by a narrative explanation of whether remuneration policy for directors differs from remuneration policy for other employees and if so an explanation of why.
The policy should explain clearly how pay supports the strategic objectives of the company and include better information on how directorâs pay relates to that of the wider workforce. This includes increased transparency on employee pay, including information which will show the difference between rises in directorsâ pay and that of the employees.
Companies will have to spell out their approach to exit payments. When a director leaves, the company must publish a statement explaining to shareholders exactly what payments the director has received. Companies will not be able to pay more than shareholders agree.
Shareholders will have a binding vote on a companyâs pay policy including their approach to exit payments. Rather than being a one-off vote this will be a lasting and binding control on pay. A company will only be able to make payments within the limits that have been approved by a majority of shareholders.
This binding vote will happen annually unless companies choose to leave their pay policy unchanged, in which case the vote will happen at a minimum every three years.
Alongside the binding vote on policy, there will, as now, be an annual advisory vote on how the policy has been implemented, including all remuneration paid in the previous year. If a company fails the advisory vote, this will automatically trigger a binding vote on policy the following year.
An implementation report
The consultation also proposes that companies will continue to report annually on the actual payments made to directors. There will continue to be an annual advisory vote by shareholders. The government proposes that the implementation part of the report includes the information set out below:
1. single total figure of remuneration for each director
2. detail of performance against metrics for long term incentives
3. total pension entitlements (for defined benefit schemes)
4. exit payments made in year
5. detail on variable pay awarded in year
6. total shareholdings of directors
7. chart comparing company performance and CEO pay
8. information about who has advised the remuneration committee
9. shareholder context.
The government also intends to have in place clear guidance on the level of detail and type of information that should be reported. This should be jointly agreed by the business and investor communities. The guidance should be in place before these proposals take effect.
The government proposes that the single total figure is set out in a prescribed table format with the following headings:
(e) long term incentive plan (LTIP).
The above headings will need to reflect all pay received by an individual under the terms of the pay policy set out in the companyâs agreed pay policy. If pay is simplified the table could have fewer entries. The government has set out in the consultation what should be captured within the table and how it will be measured.
For all annual bonus and LTIP contained within the single figure table, the report shall set out:
(i) What the performance conditions were and the relative importance of each;
(ii) Within each performance condition, the targets originally set and the potential level of award achievable;
(iii) For each performance condition, how the company performed against the targets set for that condition;
(iv) Where the committee had discretion, how it exercised that discretion; and
(v) The resulting level of reward.
For those elements of pay that were awarded in relation to the financial period being reported on and were subject to deferral, the report will also set out the percentage deferred and whether it was deferred in cash or shares.
The Government proposes that the report contains the following information about awards made in the current year under long term incentive plans;
(i) Schemes â the type of long term award (e.g. shares, matching shares, options)
(ii) Basis of award â calculation of face value (e.g. x times base salary)
(iii) Face value
(iv) Vesting maximum if above face value
(v) Percentage of the award that would vest at threshold performance
(vi) Date performance period ends
(vii) Summary of performance criteria if not set out elsewhere
Companies will also be required to report on whether they have taken steps to seek the views of their workforce.
The regulations currently require those parts of the remuneration report that relate to payments made to be audited. The government proposes to limit the sections of the report that are subject to audit to those areas within the annual report on the implementation of the policy where it is necessary to provide shareholders with the assurance that the information provided is free from material error. The government proposes that the following sections of the report are subject to audit:
1. single total figure for remuneration
2. detail of performance against metrics for variable awards included in the single figure
3. total pension entitlements (for defined benefit schemes)
4. exit payments made
5. detail on variable pay awarded in year.
Further details on the above announcement can be found on the BIS website.