Directors' remuneration: second BIS consultation on revised remuneration reporting regulations

Practical Law UK Legal Update 6-525-1009 (Approx. 8 pages)

Directors' remuneration: second BIS consultation on revised remuneration reporting regulations

by PLC Corporate

Background

Throughout 2012 and 2013, the Department for Business, Innovation and Skills (BIS) has been developing and consulting on proposals for the reform of the disclosure and corporate governance framework for quoted companies' directors' remuneration (executive directors' remuneration being the principal focus of concern), see Practice note, Directors' remuneration report: Reform: Enterprise and Regulatory Reform Bill 2012-13 and revised regulations: 1 October 2013.

On 28 June 2012, BIS published a consultation on executive remuneration reporting requirements, together with draft regulations which set out the proposed form and content of the directors' remuneration report. The draft Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2012 (draft regulations) proposed that the directors' remuneration report will be in two parts:

A future remuneration policy part, which sets out the company's remuneration and loss of office payment policy. In accordance with the proposed new section 439A of the Companies Act 2006 (CA 2006), the remuneration policy must be approved by the shareholders at least every three years. Under the proposed new Chapter 4A of Part 10 of the CA 2006, companies will only be permitted to pay the directors' for their service or loss of office in accordance with the approved policy.
An implementation report, which will be required annually and will be subject to an advisory vote, under section 439 of the CA 2006.

For further information on the June 2012 consultation, see Legal update, Executive remuneration: BIS consultation on revised remuneration reporting regulations.

Amongst other things, the draft regulations required the implementation part to include disclosure of a single figure for total remuneration for each person who served as a director during the year. On 21 June 2012, the Financial Reporting Lab published a report on investors' views as to how a single figure for a director's total remuneration in a directors' remuneration report should be calculated, see Legal update, Executive remuneration: Financial Reporting Lab report on a single figure for remuneration.

The draft regulations also required disclosure, in the policy part, of a graphical representation of the directors' expected total remuneration for threshold, maximum and below-threshold performance (scenario charts) and a graph, in the implementation part, comparing company performance over several past years (in the form of one year total shareholder returns) with a single figure for the total pay of the CEO over the same years. On 5 March 2013, the Financial Reporting Lab (Lab) published a report on investors' and companies’ views of the government's proposals to require directors' remuneration reports to include charts relating historic and future company performance to executive directors’ remuneration, see Legal update, Executive remuneration: Financial Reporting Lab report on scenario and performance charts.

Consultation on revised reporting regulations

On 12 March 2013, BIS published a second version of the draft regulations (revised regulations), to reflect comments made during the consultation process. The key changes made to the version of the draft regulations published in June 2012 are set out blow.

Introductory and remuneration committee chair's statement (Parts 1 and 2)

The revised regulations clarify that nothing in the regulations prevents directors from setting out in the remuneration report any such additional information as they think fit.

The revised regulations provide that the remuneration committee chair's statement, contained in the remuneration report, must set out the key messages on remuneration and the context in which decisions have been taken, and the major changes during the year.

Implementation part (Part 3)

Single total figure of remuneration for each director

The revised regulations provide:

That the implementation part of the report may provide a separate table for non-executive directors, although as currently drafted, this should still be in the same form as for the executive directors.
Flexibility to include in the single total figure table, additional columns, together with a note setting out the basis on which the figures are calculated and other such details as are necessary for an understanding of the figures.
Where any money or other assets reported in the single figure table prepared in the previous year are clawed back for any reason in the financial year being reported, the clawback may be shown in a separate column as a negative value and deducted from the total figure.
Apart from the first year, each column shall contain comparative figures from the previous financial year as well as the figure for the financial year in respect of which the report is prepared.

Payments within the reporting year to past directors

The revised regulations include a new provision that the remuneration report must include details of any money paid or other assets transferred in the relevant financial year to any former director who was not a director of the company at the time, excluding any sums shown in the single figure table.

Statement of performance targets

The revised regulations provide that details of performance targets must be disclosed, either in the policy part (if the policy is being proposed for approval) or, in the implementation part (if a policy vote is not proposed). Therefore, if a company chooses not to put the remuneration policy to a vote (for example, year 2 and year 3 after the policy vote in year 1), it must include the details of the performance targets for the relevant year in the implementation part, if they were not disclosed in a previous report.

Loss of office payments

The revised regulations provide that loss of office payment disclosures must also include the treatment of outstanding incentive awards that vest on or following termination.

Performance graph

BIS has aligned the requirement to include a performance graph with the findings of the Lab. The Lab found that companies and investors wished to retain the current five year comparative TSR table but supplement it with a table setting out historic CEO total remuneration (the single figure), together with the CEO's annual bonus rates and long-term incentive vesting rates, both expressed as a percentage of the maximum opportunity in the relevant years. For further details of the Lab's research and report, see Legal update, Executive remuneration: Financial Reporting Lab report on scenario and performance charts.

Percentage increase in remuneration of CEO

The requirement to disclosure this information has been moved from the policy part to the implementation part.

Relative importance of spend on pay

This disclosure has also been moved from the policy part to the implementation part and requires a graph showing the percentage of spend on profits retained by the company, profits distributed, tax paid and overall expenditure on pay, identifying within that figure the overall spend on pay for directors.

Consideration by the directors of matters relating to directors' remuneration

The revised regulations have added an additional requirement that the remuneration report must include details of how the members of the remuneration committee have satisfied themselves that the advice the committee received was objective and independent.

The revised regulations also include an exemption from disclosing details of any person who provided advice to the remuneration committee if that advice was legal advice on compliance with any relevant legislation.

Statement of shareholder voting

The disclosure of details of the policy vote at the last meeting such a vote was proposed has been changed to the percentage (rather than number) of votes for and against and number of abstentions received.

Directors' remuneration policy (Part 4)

The revised regulations clarify that where a remuneration policy is to be put to a meeting for approval and it is intended that provisions of the last approved remuneration policy shall continue to apply after the approval of the policy, this fact shall be stated in the policy and it shall be made clear which provisions shall continue to apply and for what period of time.

The revised regulations also state that notwithstanding the disclosures required under Part 4 (directors' remuneration policy), the remuneration policy must set out all those matters necessary to be contained in the policy for the purposes of the application of the new Chapter 4A of Part 10 of the CA 2006 (which provides that no remuneration or loss of office payments may be made unless they are consistent with the approved policy).

Future policy table

The revised regulations include additional provisions that:

The future policy table shall include details of performance measures used, which should include a description of both the measure and any relevant target. The targets for the first year in which the policy is to operate (and where possible future years) shall be set out. Where targets cannot be set for future years, there shall be set out an indication of the approach that will be taken to setting the targets and how it is intended such targets will relate to those set in the first year.
Nothing in the revised regulations requires the disclosure of information if it would be seriously prejudicial to the interests of the company.
The table shall set out the fee to be paid to the non-executive directors and such other items as are to be considered part of their remuneration.

Approach to recruitment remuneration

The revised regulations include a new provision which requires disclosure of the principles which the company would apply to agreeing a remuneration package for the appointment of a new director. The statement must set out the various elements which would be considered by the company for inclusion in that package and the maximum level of salary which may be awarded, expressed as a percentage of the salary of the highest paid director.

Service contracts

The revised regulations amend the requirement to disclose details of service contracts and provide that the policy must contain a description of any obligation contained, or proposed to be contained, in a directors' service contract or terms of appointment, which could give rise to, or impact on, remuneration or loss of office payments, which is not disclosed elsewhere in the remuneration report.

Scenarios

The revised regulations have been amended to reflect the Lab's report on scenario charts and provide that such charts, which sets out an indication of what could be received by each director under the policy, must show the following three scenarios:

Minimum, which is fixed elements of pay.
On-target or on-plan, which provides an indication of what a director would receive if the director was performing in line with expectation, plan or budget.
Maximum, which is total remuneration including all fixed and variable elements, where the variable elements are paid out in full.

For further details of the Lab's research and report, see Legal update, Executive remuneration: Financial Reporting Lab report on scenario and performance charts

Revised directors' remuneration policy (Part 6)

The revised regulations include provisions on the contents of a revised remuneration policy. Such policy must contain all those matters required by Part 4 (Directors' remuneration policy) and shall be in the same form as that set out in the directors' remuneration report.

Interpretation (Part 7)

This part of the revised regulations makes it clear that a remuneration report can clearly distinguish between directors who are non-executive and those who are executive and are in receipt of variable pay. Any requirement under the regulations may, in respect of non-executive directors, be omitted or modified where that requirement is not applicable given the nature of the appointment of such a director.

Next steps

The consultation closes on 25 March 2013. It is proposed that the The final regulations will be laid before Parliament during the spring but after the Enterprise and Regulatory Reform Bill 2012 -2013 has received Royal Assent. It is proposed that the regulations will come into force on 1 October 2013.

Source

Draft Statutory Instrument: the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013

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