BIS strengthens reporting framework for directors’ pay

THE GOVERNMENT has published draft regulations determining what companies must disclose in pay reports.

The draft regulations propose splitting directors’ remuneration into two separate parts. The first, which will be subject to the binding shareholder vote, will set out all elements of a company’s remuneration policy, while the second will detail how the company implemented its pay policy.

For the first time, companies will be required to set out every element of pay to which a director could be entitled and how it supports the achievement of strategic objectives, the maximum value and performance measures that will be applied. The report will also set out:

• Scenarios for what directors will get paid for performance that is above, on and below target;
• Information on the percentage change in profit, dividends and the overall spend on pay;
• Principles on which exit payments will be made, including how they will be calculated and how performance will be taken into account;
• Information on employment contracts;
• Factors the company has taken into account when deciding on pay policy, including employee pay levels and views.

The report on how the policy was implemented, which will be subject to an annual advisory vote, will include details of actual payments made, set out as a single figure for the total pay directors received for the year. The figure will cover all rewards, including bonuses, long-term incentives and pension provision.

This will allow shareholders to make comparisons between the pay directors receive year on year, and between companies. The report will also include:

• Information on how well companies performed against conditions and how this affected the overall level of pay;
• Total pension entitlements (for defined benefit schemes);
• Exit payments awarded in the reporting period;
• Details on the potential future value of new variable awards made in year;
• Total shareholdings of directors;
• A comparison between company performance and the chief executive’s pay;
• Information about who has advised the remuneration committee;
• Details on how shareholders voted at the previous AGM and any action the company took in response.

The regulations follow last week’s announcement by the business secretary, Vince Cable, of the most comprehensive and radical reform of the governance of directors’ pay in a decade, including the introduction of a new binding vote on company pay policy.

“Over the last decade, directors’ pay has quadrupled with no clear link to company performance. At the same time, company reports have become increasingly complex without giving shareholders the information they need,” Cable said.

“For the first time, companies will be required to set out every element of pay that a director could be entitled to and how it supports long-term company strategy and performance. If the policy isn’t specific enough, shareholders will have a legally binding vote they can use to reject it.

“Companies will also have to clearly disclose directors’ pay in a single figure. This means that it will no longer be possible to mask what they are actually earning.”

The regulations are expected to come into effect from October 2013, alongside primary legislation on binding votes.