Directors' know how: what you should know about the upcoming changes
18 August 2016

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Directors' know how is a monthly article, which highlights key rule changes, proposed changes and market updates so that you know what is coming down the track.

Executive Remuneration Working Group issues recommendations to rebuild trust in executive pay

The Executive Remuneration Working Group has published its Final Report, following consultation with stakeholders including the Quoted Companies Alliance.

The report cites the poor correlation between company performance and remuneration outcomes and rising levels of executive pay as the primary symptoms of the level of concern among companies and investors at the current levels and complexity of executive pay.

The Working Group proposes, in its final report, ten recommendations to rebuild trust in executive pay structures in the UK by strengthening remuneration committees and their accountability, boosting shareholder engagement, making target-setting more transparent and giving companies discretion to explore how differing pay structures may gain market trust.

The report includes:

  • A call for Boards to explain why they have chosen their company’s maximum pay level, with consideration of relativities such as the pay ratios between CEOs and different employees.
  • A call for transparency around the target-setting employed in bonuses, including retrospective disclosure of performance ranges and provision of explanations where discretion has been used.
  • A proposal that whole boards be required to engage in the remuneration-setting process, and for non-executive directors to have at least a year’s experience on a remuneration committee before being appointed as its Chair, plus clear disclosure of the rationale to be provided when discretion is used in awarding pay.

The report recognises that for smaller companies, the suggested level of 500% of salary as shareholding guidelines (the current median level of shareholdings for a FTSE 100 chief executive) is too high and difficult to achieve, forcing award levels up. The Working Group discussed alternatives with stakeholders and presents in the report a few alternative approaches for smaller companies.

FRC update on improving reporting by smaller listed and AIM companies

The FRC has issued an update to its discussion paper: Improving the Quality of Reporting by Smaller Listed and AIM Quoted Companies. The FRC summarises the feedback from stakeholders to its June 2015 report on the quality of reporting by smaller quoted companies and sets out progress against its proposals.

Overall, respondents:

  • urged the FRC to avoid imposing additional regulatory burdens on smaller quoted companies;
  • agreed that IFRS should continue to be used by small and large quoted companies alike;
  • welcomed the proposal to issue annual reminder letters aimed at smaller quoted companies highlighting key areas of focus for investors;
  • encouraged the development of practical guidance for audit committees on evaluating the adequacy of the finance function and process; and
  • strongly supported the proposal to explore ways to provide more focussed and practical support for preparers through training and CPD regimes.

You can read our response to this Discussion Paper here (July 2015).

GC100 and Investor Group Directors' Remuneration Reporting Guidance

The GC100 and Investor Group has published a revised version of its Directors' Remuneration Reporting Guidance.

The guidance addresses the key elements of the government’s requirements for directors' remuneration reporting by listed companies subject to the provisions of the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations. It suggests ‘best practice’ from the perspective of investors and companies, and encourages companies to avoid boilerplate disclosures and instead ensure that disclosures are appropriate and relevant for the company in question.

Key changes to the guidance include recommendations on:

  • Flexibility, discretion and judgement – Remuneration committees should exercise discretion to balance remuneration outcomes with management performance and shareholder experience.
  • Commercially sensitive performance measures of targets – Directors should only not disclose information on performance measures of targets if there are company-specific circumstances that suggest these are commercially sensitive.
  • Payments to past directors and for loss of office – Where no payments to past directors have been made, companies should consider making a "nil return" in the annual remuneration report. This could also apply to payments for loss of office.
  • Percentage change in remuneration of director undertaking the role of CEO Companies reporting on the annual percentage change in aspects of the CEO’s remuneration should select an appropriate comparator group, not a narrow group of senior managers.
  • Future policy table The maximum salary, including each component of remuneration should be disclosed and explained for each executive director.