The GC100 and Investor Group has published guidance on how the new directors' remuneration regime for quoted companies, which came into force on 1 October 2013, is to be implemented. The new regime aims to make reporting more transparent to shareholders and investors by requiring quoted companies to communicate clearly to investors how their policies are being implemented.
The new regime
The new regime, set out in Chapter 4A of the Companies Act 2006 and The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, will apply to UK incorporated quoted companies. It has two key elements:
- a requirement that companies may only remunerate directors in line with a policy that has been approved in advance by its shareholders (remuneration policy); and
- an annual remuneration report which includes implementation of remuneration policy over the coming financial year and is subject to an advisory vote (implementation policy).
The first element of this revised regime certainly presents a challenge for all quoted companies. They will now be unable to pay their directors without a remuneration report approved by an ordinary resolution of shareholders. The much needed guidance has been issued in an attempt to clarify the requirements that all quoted companies will be expected to follow.
One of the key principles of the guidance is discretion. This will be critical in providing flexibility to companies, particularly as the remuneration policy must be approved by investors at least every three years under the new regime and the guidance recommends three-year cycles.
The remuneration policy will set legally binding boundaries on the level of remuneration that can be paid to directors. It is therefore imperative that these boundaries are able to accommodate future business needs.
The guidance states that remuneration policy can take effect from the general meeting in which it is approved or any subsequent date within the current year but investors are generally in favour of the former.
The remuneration policy must cover both executive and non-executive directors and has to refer to each element of the remuneration package e.g. the maximum amount that can be remunerated, assessment of performance, withholding of payments.
In respect of disclosure of the maximum amount, it is our view that companies may wish to provide some 'headroom' to provide for flexibility. Although the guidance states that the maximum may be non-monetary as well as monetary, it does not provide instances of the former that would be acceptable to investors. This is likely to prove a key point of discussion with shareholders.
The requirement to disclose performance measures can be in broad terms and grouped into categories. It is important to note that specific targets are not required to be disclosed but the remuneration policy must state how they are to be determined.
There is also a requirement that the remuneration policy must include a company's policy on termination payments. The starting point for this will be the contractual entitlement on termination and the guidance therefore adds that sufficient flexibility should be built into the policy as the remuneration committee can only exercise discretion where it is permitted to do so.
The Listing Rules
In light of the new regime, it is worth noting that the Financial Conduct Authority (FCA) has published a consultation paper on consequential changes to the Listing Rules in order to remove duplication and to increase transparency, which the FCA intends to implement on 1 January 2014. It should also be noted that companies subject to the Listing Rules need to comply with both sets of requirements from 1 October 2013 until the changes to the Listing Rules come into force.
While the guidance goes into further detail, the key features are as outlined above. Perhaps the overarching principle to bear in mind for quoted companies is that the guidance appears to recognise the need for flexibility where a company's remuneration policy is being set in three-year cycles.
While the guidance certainly provides a basis for discussion, there are a number of key practical implications in respect of the implementation of this new regime which are beyond the scope of this note.
They are likely to be most apparent when companies and investors are sat around a table to agree policy.