Directors' remuneration in listed (not AIM) companies
Department for Business Innovation & Skills (BIS) commented on the draft regulations (see here) requiring fully listed (but not AIM) companies to hold binding shareholder votes on directors' salary. It also provides for an additional, but non-binding, shareholder vote on the application of pay policy and enhanced remuneration admission in annual reports and on websites. This is effective from 1st October 2013.
For the purpose of the new rules, pay or payment typically considers the receiving of both cash and shares. Whilst this may not be obligatory for your company, there may still be pressure from investors to comply voluntarily.
Contents of the Report
- The summary at the beginning of the policy report must show significant alterations from the preceding report as well as any important messages.
- A number of disclosures have been added to the implementation report from the policy report.
- When providing set values for estimated and previous remuneration and Total Shareholder Return (TSR) comparisons, a few of the valuation approaches have been amended to incorporate the suggestions of the Financial Reporting Council. However, many businesses are still doubtful that these statistics present any significant data.
- Performance goals for yearly bonuses need to be divulged unless deemed 'seriously prejudicial to the interests of the company', although once a bonus has been awarded, objectives will have to be disclosed without any scope for exemption on commercial confidentiality grounds.
- A detailed maximum salary for possible new employees has to be disclosed.
- All payments to directors, and former directors, are to be included.
Reporting requirements and director liability
When a director leaves, the company is only required to make one declaration of what they are permitted to receive subsequently (providing the business has clarified what circumstances and eventualities were involved.) However, details are required to be added to the company's website.
The legislation has been adjusted to state directors can be relieved from liability in occurrences where they have acted justly and sensibly (and a court in its discretion agrees). The difficulties here arise when any payment is in breach of the policy, and if the director in question is unattainable, the remaining directors could be accountable.
If a company fails to pass its policy vote...
Failing your vote in the first year could have severe ramifications because if unable to pass a succeeding vote by the end of the year, they will not be able to pay their directors from the second year of the legislation's operation until shareholder authorisation for payments has been received.
If a later vote fails, a company can adopt the previously approved policy as a contingency. However, with the first vote, there will be no preceding policy to derive this information from, nor can it be overruled by agreed shareholder approved option schemes and/or Long Term Incentive Plans (LTIPs).
When does the legislation take effect, and when will the legislation be finalised?
It will now affect companies' accounting periods which begin on or after 1st October 2013 - so the first businesses that will be affected by the regulation will be those whose financial year ends on 30th September 2013 (not 31st December 2013 as originally suspected). Therefore, in the instance of a December year end, a company director's payments would be caught at the latest on 1st January 2015, but the company must report in the new format and pass a binding shareholder AGM resolution from Spring 2014.
The proposal of yearly, as opposed to the original three year policy votes, has been dismissed and the first draft in general has been met with much criticism. It will be of great interest to see what the final draft holds when published in late spring. With this rapidly approaching, companies are reminded to begin conforming to the new regime in earnest, taking heed on how their current remuneration structure fits alongside the new legislation, and whether any alteration is required.
For more information, please contact Fiona Bell via Fiona.Bell@rm2.co.uk.