Reporting on directors’ remuneration: GC100 and Investor Group guidance | Practical Law

Reporting on directors’ remuneration: GC100 and Investor Group guidance | Practical Law

New requirements on directors’ remuneration reporting for quoted companies came into force on 1 October 2013. The GC100 and Investor Group have now published guidance offering practical steps on how to implement the new reporting requirements.

Reporting on directors’ remuneration: GC100 and Investor Group guidance

Practical Law UK Articles 8-542-5607 (Approx. 3 pages)

Reporting on directors’ remuneration: GC100 and Investor Group guidance

by Lucy Ryland and Graeme Standen, Practical Law Corporate and Practical Law Share Schemes & Incentives
Published on 26 Sep 2013 • United Kingdom
New requirements on directors’ remuneration reporting for quoted companies came into force on 1 October 2013. The GC100 and Investor Group have now published guidance offering practical steps on how to implement the new reporting requirements.
New requirements on directors' remuneration reporting for quoted companies came into force on 1 October 2013 (see feature article "Directors' remuneration reports: the final picture", this issue). The GC100 and Investor Group (the group) have now published guidance offering practical steps on how to implement the new reporting requirements (the guidance).

Background

When introducing its proposals on directors' pay in June 2012, the government recognised that the new framework would need to be supplemented by best practice guidance to assist companies and their investors (see News brief "Executive pay: the final proposals").
Representatives of the GC100 (the association for the general counsel and company secretaries of companies in the FTSE 100) and the Corporate Governance Forum (whose members comprise leading UK institutional investors) convened the group, which was supported by editors from Practical Law, to develop the guidance. The guidance therefore sets out a view of best practice as discussed between companies and investors.
While the guidance relates closely to provisions of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 as amended (SI 2008/410) (2008 Regulations), it also recommends some disclosures that go beyond the 2008 Regulations, with the aim of helping shareholders to make better-informed voting decisions.

Key areas of the guidance

The guidance is comprehensive and closely follows the order of the 2008 Regulations. Key areas covered include:
  • The expectation that remuneration policies should stand the test of time and that, therefore, companies should normally seek approval for remuneration policies once every three years, rather than on an annual basis.
  • The necessary flexibility of remuneration policies and the exercise of discretion and judgment by the remuneration committee. Although the group does not recommend the inclusion of a broad discretion to amend pay in the remuneration policy, preferring narrowly drawn specific discretions instead, it accepts that it might be reasonable to provide for a broad discretion applicable only in genuinely unforeseen and exceptional circumstances.
  • Commercial sensitivity as a reason for delayed disclosure of performance measures and targets. The guidance suggests that a measure or target will be commercially sensitive if its disclosure is likely to damage the company's commercial interests.
  • Possible areas to be covered in the annual statement, including the remuneration philosophy that underpins decisions and how company performance during the year is reflected in the remuneration outcome.
  • The approach that companies should take to identify, and address, a significant lack of shareholder support for annual remuneration reports or remuneration policies. The guidance suggests that companies might consider the number of votes withheld as well as votes against, and should identify a threshold for concern (appropriate to each company) that is well below 50%. The group suggests that 20% of votes may be appropriate in many cases.
  • The grandfathering of commitments made before the new requirements came into force or before a new policy comes into effect.

Looking ahead

The group wants to encourage innovation by companies in remuneration reporting, and believes that remuneration disclosures and policies should be tailored to each company, avoiding boilerplate language.
According to the group, the success of the new reforms and the guidance should not be measured by the number of directors' remuneration reports voted down but, rather, by the quality of engagement and stewardship between companies and investors. The group anticipates that this engagement will contribute to a company's long-term success for the benefit of all concerned, and provide companies with some certainty over the approval of their remuneration polices.
The group intends to review the guidance from time to time as practice in this area evolves.
Lucy Ryland and Graeme Standen, Practical Law Corporate and Practical Law Share Schemes & Incentives. The guidance is freely available at http://uk.practicallaw.com/groups/uk-gc100-investor-group.