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07 Oct 2013

New rules on directors' remuneration now in force

Employee incentives alert

Tuesday 8 October 2013

On 1 October 2013 radical changes to the way in which executive pay is disclosed and reported, including the requirement for a binding shareholder vote on a company's pay policy, came into force. These reforms are in response to the ongoing scrutiny of both the quantum and structure of directors' remuneration and seek to make companies more accountable for their remuneration policy. Companies subject to the new regime should already be preparing for the next reporting season to ensure compliance with the new regulations.

Key changes

* The format for the directors' remuneration report will now comprise three parts:

(a) A statement from the Chair of the Remuneration Committee;
(b) An annual report on remuneration, which will set out the actual payments made to directors in the financial year being reported on ("Implementation Report"); and
(c) A remuneration policy report, which will set out the company's forward looking policy on directors' remuneration ("Policy Report").
* Shareholders will have a binding vote on the Policy Report at least once every three years. The Policy Report will cover the company's approach to setting salary, pensions, bonus and incentive awards and, in addition, for the first time, termination packages and recruitment packages for new directors.
* Payments can only be made where authorised under the company's approved remuneration policy, otherwise the company must obtain specific shareholder approval for making the payment.
Directors who authorise payments not contemplated by the approved remuneration policy will be personally liable unless they can demonstrate that they acted reasonably and honestly.
* The Implementation Report will contain more detailed disclosures, including a single pay figure and the percentage increase in the CEO's pay over the reporting year relative to that of employees of the company (or group) taken as a whole. This report must also contain a statement describing how the company intends to implement its approved remuneration policy in the following financial year.

As now, the Implementation Report is subject to an annual advisory vote of shareholders. One of the main challenges for companies will be to formulate a remuneration policy which is fully compliant with the new regulations, providing certainty for shareholders, whilst at the same time retaining sufficient flexibility to respond to unforeseen circumstances and new developments during the three-year period the policy is to apply.

Which companies are affected

The new regime applies to all UK incorporated quoted companies. This includes companies whose shares are officially listed in an EEA member state or listed on the New York Stock Exchange or NASDAQ.

Non-UK incorporated companies listed on the main market of the London Stock Exchange and companies trading on AIM fall outside the new regime. Despite such companies not being required to comply, we expect that many will seek to do so, at least in relation to some elements of the new regime.


The new regime applies to accounting periods ending on or after 30 September 2013.

Companies will seek shareholder approval for their Remuneration Policy at their next annual general meeting. So for companies with a December 31 year end, approval will be sought at their annual general meeting in Spring 2014.


In March 2013, the Department for Business, Innovation and Skills published frequently asked questions which focused on the new voting regime to help companies understand how the reforms would affect them and the timeframe for implementation.

Further guidance has recently been published by the GC100 (the association of general counsel and company secretaries of companies in the FTSE100) and the Corporate Governance Forum. This provides commentary on the new regime for reporting directors' pay and offers practical advice as to what is considered best practice.

It is anticipated that the main institutional investor bodies (such as the Association of British Insurers and the National Association of Pension Funds) will update their guidelines in the forthcoming months on what they consider to be best practice following the introduction of the new regulations.

Listing Rules

The Financial Conduct Authority ("FCA") issued a consultation on 26 September 2013, relating to consequential changes to the Listing Rules resulting from the changes to the directors' remuneration reporting requirements.

In brief, the FCA proposes to delete those Listing Rules that relate to directors' remuneration where the new regulations have the same outcome. The FCA intends to introduce the changes to the Listing Rules as from 1 January 2014. These will apply to any premium-listed company incorporated in the UK in respect of a financial year ending on or after that date.


Barbara Allen

Barbara Allen

T:  +44 20 7809 2231 M:  +44 7771 531 553 Email Barbara | Vcard Office:  London