Directors' pay reformed to include more information in annual reports

FROM OCTOBER, new regulations will be introduced to require quoted companies – those with shares trading on recognised stock exchanges, such as the London Stock Exchange or the New York Stock Exchange, although not alternative markets – to include more information in their annual directors’ remuneration report.

Actually, ‘more information’ may be misleading as, in many ways, it is the display of that information in a clearer format that the regulations are striving for.

Since 2002, quoted companies have had to include a directors’ remuneration report in their annual accounts, but these have become so complicated that the original purpose for including such information seems to have been lost. Different figures given in reports for different elements of executive remuneration have made it almost impossible for shareholders to ascertain what exactly the executives were being paid.

The new regulations aim to simplify these reports, making it easier for shareholders to see what is being paid. In particular, after last year’s ‘shareholder spring’, there is an emphasis on having to show that directors are being paid for good performance of the company (which is in line with shareholders’ interests), rather than being paid for failure, as was (and maybe still is) the perception, by the media at least, for certain companies.

Although the regulations only apply to quoted companies, other listed companies, such as those on AIM, may well see this as the direction the market is heading in and therefore as an opportunity to get ahead of the competition. There is nothing stopping AIM-listed companies from complying voluntarily with the new requirements, perhaps in an attempt to keep institutional investors onside or possibly to attract new investors. There is equally the possibility that these regulations may be extended to AIM-listed companies at a later date, although this is purely speculative at this stage.

Above, in outline, are some of the major new disclosure requirements – major in the sense of time requirements to implement. However, this is by no means an exhaustive list of obligations under the new regulations.

Fundamental change
One of the most fundamental changes (and one of the most daunting for companies) is the requirement to include a single figure of remuneration for each director (both executive and non-executive), including base salary, fees, bonuses, any benefits-in-kind, all share incentives and pension contributions. The complexity of share awards alone (to take just one element of remuneration) means this is no small task, and will likely take substantial time and resource to work out.

Another important addition is the obligation to include a summary table of the company’s remuneration policy. This table must show each element of the remuneration, how each element supports the short-term and long-term strategic objectives of the business, how it is put into practice, and any details as to how it is affected by performance. The regulations make reference to including detail in respect of the company’s policies on recruitment and on payments for loss of office.

Linked to the remuneration policy summary table is the requirement to include scenario graphs showing how the components of remuneration would pay-out in different situations. This is one area where many quoted companies (about 40% of the FTSE 100) have complied already, showing bar charts in their reports which clearly display how much a director would receive following theoretical results.

These new requirements focus on providing information to shareholders that is clear and straightforward. But there are other new disclosures that will need to be made which focus on communication with shareholders: ensuring their needs are taken into account, as well as communication with employees across the wider group, and ensuring that the remuneration policy for executives is not so wildly inconsistent with other employees. Rather than making sure shareholders are appropriately informed, these disclosures focus more on ensuring that stakeholders – other than the directors themselves – have their views heard.

These regulations will apply to periods beginning on or after 1 October 2013. This means that companies with a financial year end of 30 September will be the first to comply with the new regulations. It is not an understatement to say that this will have a big impact on preparing the remuneration report, and a close dialogue with your remuneration advisers is crucial to understand what the new regulations mean for your company and how they can best be complied with. Whenever your financial year ends, it is clear that it will take time to gather the information necessary to make these new disclosures, so it is important that directors begin this process sooner rather than later.

Bernhard Gilbey is partner and leader of the global tax strategy and benefits practice at Squire Sanders

Box: New regulations

The new Directors’ Remuneration Reporting Regulations will require quoted companies to make new disclosures in their remuneration reports, including:
• a single figure of remuneration for each director (both executive and non-executive);
• a table summarising the company’s remuneration policy;
• scenario charts showing possible pay-outs in various situations;
• a graph of CEO pay against shareholder return over the past five years;
• fees paid to remuneration advisers;
• measures taken to consider employees’ pay across the wider group; and
• measures taken to ensure that a proper consultation process has been carried out with both shareholders and employees.