The new-style remuneration report is comprised of three separate parts:

The requirements for the report on remuneration and policy report are highly prescriptive, although the law may give companies more leeway than they expect. The chairman's statement and the report on remuneration remain subject to an advisory vote only, as under the old regime. However, the policy report is now subject to a binding vote so that, once approved, any payment received by a director or former director that is not consistent with the policy will need specific shareholder approval.

In approaching their remuneration reports, companies need to bear three key, but often competing, objectives in mind.

Compliance. While there are potentially fines for a report that does not meet the legislative requirements, it seems that a non-compliant policy will still be an approved policy that enables the company to make payments to its directors in accordance with it. The Department for Business, Innovation & Skills or the Financial Reporting Council may investigate infractions, but the requirement that certain parts of the implementation report (although not the policy report) have to be audited means that a company's auditor remains the key person to satisfy here.

Flexibility. The policy needs to give the company sufficient flexibility to make payments at the desired level to its directors, without needing shareholders' approval, in:

Many companies have, over the years, taken advantage of Listing Rule 9.4.2, which allows an incentive to be implemented for a director for recruitment or retention purposes without prior shareholder approval. When the new system becomes established, the Financial Conduct Authority has said that it may consult on the continuing availability of this exception, as it is now potentially at odds with the more restrictive Companies Act regime (www.fca.org.uk/news/policy-statements/ps13-11-changes-to-the-listing-rules). Meanwhile, companies should reserve the power to use this exception.

Approval. This is clearly the most important objective. If shareholders do not approve a policy in the initial year of the regime, the company will have to go back to shareholders to seek their approval before the deadline for a policy to be in place. Some investors expressed concern about making the vote on the policy report binding in case the extreme consequences deterred investors from voting against it. Only time will tell whether investors will challenge companies by voting against policy reports in significant numbers. However, faced with conflicting needs for compliance with the strict letter of the law, shareholder expectations and flexibility, some companies may try to keep their own freedom of manoeuvre by giving themselves maximum flexibility but giving key investors private reassurance.

Some particular issues, which have arisen when companies have tried to balance the above initial considerations, are as follows:

Effective date. Companies have some flexibility over when the first policy published in the new format becomes effective. Companies can choose any date up until the start of the financial year following the year in which the first vote on the new policy is held. For example, in the case of a company with a 31 December year end, the policy must come into effect by 1 January 2015.

Guidance from the GC100 and Investor Group and other investors is firmly in favour of the policy taking effect from the AGM at which the relevant first policy is passed, even though this will be several months into the financial year, and this has become market practice (see box "Background"). Arrangements made in accordance with previous policy(ies) need to be grandfathered by the new policy so that the company can pay out on any prior commitments.

Consistency with approved policy. Payments may only be made to directors that are consistent with the approved policy (or have separate shareholder approval). The full effect of this restriction in practice is not yet known as its legal meaning is unclear. Payments that are inconsistent would clearly be prohibited, so companies may be inclined to draft a broad policy on the basis that a payment is less likely to be inconsistent with it.

Not every single element of remuneration needs to be set out in detail but, on the other hand, an overly vague and permissive policy is likely to concern investors and breach the requirement to provide a compliant level of detail. A balance needs to be struck; for example, by adding words like "normally" and "in general" before what would otherwise be concrete statements, and noting discretions to amend arrangements.

Confidentiality. To understand the context surrounding payments to directors, investors need to know the performance conditions that have been, or will be, applied. UK companies have been reticent about stating annual bonus targets for directors, arguing that their disclosure would give competitors access to confidential information, such as sales targets, which would be damaging to the business. Investors have, on the other hand, been concerned that targets have been too easy or even retrospectively waived.

By way of a compromise, the new legislation allows companies not to disclose commercially sensitive information, although they need to state that they have taken advantage of this protection and indicate when (if at all) the information will be revealed. So far, disclosure has been mixed. The GC100 and Investor Group guidance says that investors will expect disclosure as soon as practicable, but it remains to be seen whether investors follow up on this, or whether disclosure can be made privately.

Discretion. The GC100 and Investor Group has said that it does not normally want policies put forward for approval more than once every three years, so companies inevitably need some discretion in applying the policy within that timeframe. Common discretions include, for example, the number of shares covered by incentive awards and variations to performance conditions mid-term to reflect changed circumstances.

Where a policy provides for the directors to exercise discretion on any aspect of the policy, it must clearly set out the extent of that discretion. Given that payments to directors may only be made if they are consistent with the policy, it could be argued that if the policy does not expressly mention the relevant discretions, there is no discretion to make the change or payment. To avoid this argument or exhaustively having to list all discretions, one approach might be to make a generic disclosure about discretions that cover all payments, but state the confines of that discretion.

The GC100 and Investor Group is prepared to see a general discretion for small amendments that are in the spirit of the overall policy and also for bigger changes in exceptional and unforeseen circumstances where shareholders cannot sensibly be contacted in advance, but companies appear to be going further, fearing competitive disadvantage.

Maximum limits. The legislation requires that, for each component of remuneration, the maximum should be stated. It is unclear whether this is only required if a maximum has been set, or whether it specifically requires a maximum to be set. A similar point arises in respect of the company's policy for new hires, which must also state the maximum level of variable remuneration (excluding buy-outs). Companies are taking a variety of approaches, but investors certainly expect the policy to state maxima for key aspects of remuneration, or at least the framework for reaching them.

After a surge in 2014, there will not be a mass set of policies for investors to vote on until 2017. Until then, companies will be subject to the policies that they are putting forward during 2014. Living within the operational and reporting restraints that they impose is a new experience for companies and investors alike, with careful drafting of a policy being the only tool currently available for companies to avoid revisiting shareholders in difficult remuneration scenarios in that period.

Nicholas Stretch is a partner, and Isabel Pooley is a senior associate, in the employee incentives team at CMS Cameron McKenna LLP.