Draft rules on directors’ remuneration policy changes published
24 Apr 2019
The government has published draft regulations about directors’ remuneration policy and reports, which extend the scope of renumeration reporting to unquoted traded companies and introduce new requirements
24 Apr 2019
The rules are designed to give shareholders new information with which to assess the performance of directors and to judge the effectiveness or otherwise of the company’s approach to directors’ remuneration and performance incentives.
The draft regulations, which come into force on 10 June 2019 under a statutory instrument, partially implement the EU shareholders rights directive II in the UK. They amend the Companies Act 2006 and the Large and Medium-sized Companies and Group (Accounts and Reports) Regulations 2008.
The new requirements regarding directors’ remuneration policy state that where a company loses a shareholder vote on a proposed remuneration policy, it must bring a new remuneration policy to a shareholder vote at the next accounts meeting or other general meeting.
In respect of share-based remuneration to directors, the remuneration policy must provide details on vesting periods, and any deferral and holding periods, and must also give an indication of the duration of directors’ service contacts.
The remuneration policy must set out the decision-making process for its determination, review and implementation, and must explain all significant changes compared to the previous policy. The date and results of the shareholder vote on the remuneration policy must be put on the company’s website as soon as reasonably practicable and remain there for the life of the policy.
Regarding the directors’ remuneration report, under the new rules this must be available free of charge on the company’s website for ten years. The remuneration report must show the split of fixed and variable remuneration awarded to each director each year and must specify any changes to the exercise price and date for the exercise of shares or share options by directors.
The remuneration report must compare the annual change in directors’ remuneration to the annual change in pay of the company’s employees and of the company’s performance (measured in terms of total shareholder return) over a five year rolling period.
The regulations extend the scope of the UK’s existing executive pay framework to cover unquoted traded companies. According to the Department for Business, Energy and Industrial Strategy, in practice, only a very small number of UK-registered companies are traded and unquoted, and such companies appear to already comply with the existing directors’ remuneration reporting requirements.
The regulations also implement a requirement of the directive that the remuneration of persons in the role of the chief executive officer and any deputy chief executive officer must be reported even if they are not a director on the board of the company. Under existing UK law, only the remuneration of the directors on the board and shadow directors must be reported.
This instrument will come into force on 10 June 2019. Remuneration payments or payments for loss of office will need to comply with the new requirements in respect of an approved remuneration policy which takes effect on or after that date, and the new publication requirements will apply to directors’ remuneration policy and remuneration report from 10 June 2019, and for unquoted traded companies this will now include their annual accounts and reports.
The new requirements on the contents of the remuneration report will apply where the report covers a financial year on or after 10 June 2019.
An unquoted traded company will now be subject to new requirements as a result of the transposition of the directive and because the regulations bring them in line with those requirements on quoted companies.
Transitional provisions have been provided in relation to an unquoted traded company which already exists before this comes into force. They will be required to bring forward a remuneration policy for a shareholder vote in the financial year 2020 and to comply with the requirements in the law as it applies after 10 June 2019.
If an unquoted traded company, despite not being subject to the legal requirements before 10 June, has been complying with the provisions relating to a quoted company under the existing legislation, it can continue with the remuneration policy that was approved before 10 June in the same way that a quoted company can (i.e. the next remuneration policy put forward for a vote, after 10 June, would need to comply with the new requirements).
By Pat Sweet