Executive remuneration – are you in step with current practice?

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Guidance from the GC 100 and the Investment Association has been published to help companies implement the new reporting requirements on executive pay that came into force on 1 January 2019.

As reported in our September edition of Corporate Matters the Companies (Miscellaneous Reporting) Regulations 2018 (Regulations) came into force, for the most part, on 1 January 2019 introducing new company reporting requirements on executive pay, corporate governance arrangements, and how directors are having regard to the matters in section 172 of the Companies Act 2006.

In relation to executive pay, the Regulations require:

  • the annual statement of the remuneration committee to include a summary of any discretion exercised by the committee in relation to the award of directors’ remuneration;
  • companies to report how much of a director’s pay is attributable to share growth;
  • companies over a certain size to report pay ratio information.

On 7 December 2018, the GC100 and Investor Group (GC 100) published an updated version of its Directors’ Remuneration Reporting Guidance to reflect the Regulations. The guidance addresses the key elements of directors’ remuneration reporting requirements and was originally published in September 2013. In 2018, in response to the Regulations, the GC 100 conducted a thorough review of the guidance. New material has been added to address the Regulations, and existing material has been revised where appropriate. The primary areas that were amended or are new include the exercise of discretion, considerations surrounding share price appreciation and reporting of pay ratios.

In a similar vein, on 22 November 2018, the Investment Association (IA) issued a press release announcing that it had published updated Principles of Remuneration. The updated principles set out investor expectations and best practice for how companies should pay their top executives in line with the new UK Corporate Governance Code and the Regulations.

Under the new principles, the IA will expect companies to:

  • pay pension contributions to directors in line with the rate given to the majority of the rest of the workforce, rather than giving higher payments as a mechanism for increasing total remuneration;
  • broaden the triggers under which malus and clawback provisions can be used to forfeit or recover remuneration beyond the current triggers of ‘gross misconduct’ and ‘misstatement of results’, in order to make them a more effective tool to recover bonuses. Companies should also set out the process for implementing malus and clawback, not simply the triggers;
  • require directors to hold a proportion of their shares for a minimum of two years after their departure, so that they consider the long-term value of the company even after their departure; and
  • adopt new pay ratio reporting requirements early, to maximise transparency over pay and ensure that there is accountability for high levels of pay internally.

In an open Letter of Introduction to the remuneration principles addressed to the chairs of remuneration committees of FTSE 350 companies, Andrew Ninian (Director, Stewardship and Corporate Governance at the IA) noted the concern of IA members that some companies are still not understanding or responding to the views of their shareholders on remuneration. The letter also sets out some key areas of focus for 2019 AGMs, including investor and remuneration committee relations, shareholder engagement, new reporting requirements, levels of remuneration and pay for performance.

WM comment

The team at Walker Morris can help if you are unclear as to how the Regulations will affect your reporting obligations for future financial years.