Corporate governance - Government announces reforms on directors pay

Following a consultation exercise earlier this year, the Government has announced a package of comprehensive reforms in relation to directors’ pay.  These proposals are designed to restore a stronger, clearer link between pay and performance, reduce rewards for failure, promote better engagement between companies and their shareholders and empower shareholders to hold companies to account.  More specifically, the proposed changes include:

  •     A new, binding vote on future pay policy: this vote will take place annually unless companies choose to leave their pay policy unchanged, in which case the vote must take place at least every three years.  Where a company fails the binding vote, it will have to continue to adhere to its existing policy until a revised policy is agreed.
  •     A binding vote on exit payments: companies will be required to set out their approach to exit payments as part of their pay policy and so these will be subject to the binding vote.  Further, where a director leaves, the company will be required to publish promptly a statement setting out exactly what that director has received.
  •     An annual advisory vote on implementation of the pay policy: shareholders will continue to have an annual advisory vote on payments made to directors in the previous year.  Information which companies will be required to provide include a single total figure of remuneration for each director, which figure must include basic salary as well as bonus, pension and other payments.


The Government intends to enact these reforms by October 2013.

The Financial Reporting Council has also announced that, once the Government’s proposed legislation has been finalised, it will consult on relevant changes to the UK Corporate Governance Code, including whether companies should be required to report to the market in the event that they fail to obtain at least a substantial majority in support of a resolution on remuneration.

For further information on the Government’s proposals, visit
http://www.bis.gov.uk/policies/business-law/corporate-governance/executive-pay
 

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