Government strengthens reporting framework for directors' pay

This news article was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

The Government is consulting on draft regulations on what companies must disclose in pay reports.

27 Jun 2012

These regulations will fully replace existing rules and are designed to create a robust framework within which directors’ pay is set, agreed and implemented. The revised regulations will:

  • Streamline company disclosure requirements so that reports are focussed on making the link between pay and performance crystal clear
  • Introduce a new requirement to report the total pay directors received for the year as a single figure
  • Ensure shareholder engagement is sustained over the long term.

To support the new shareholder voting regime, remuneration reports will in future be split in two parts:

  • A forward-looking policy report, which will be subject to the binding shareholder vote - once approved, the company will only be able to make payments within the limits it allows
  • A report on how the policy was implemented, which will be subject to an annual advisory vote.

The Government invites comments on the draft regulations by 26 September 2012.

Business Secretary Vince Cable said:

“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.

“These regulations will significantly improve reporting. 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.

“I expect shareholders to use this new framework to maintain recent activism and challenge companies to inject greater pay discipline and prevent rewards for failure.”

The regulations are expected to come into effect from October 2013, alongside primary legislation on binding votes. The Government has also tabled amendments to the Enterprise and Regulatory Reform Bill that will allow the new voting regime to become law.