The government has amended the Department for Business Innovation and Skills’ (BIS) draft legislation requiring listed, but not AIM, organisations to hold binding shareholder votes on directors’ pay.
The new draft also provides for a further, but non-binding, shareholder vote on the implementation of pay policy and enhanced remuneration disclosure in annual reports and on websites.
The new rules require a 50% shareholder vote for an organisation’s pay proposals to take effect.
However, the legislation means that employers have some choice around directors’ pay because payments only need to be made in accordance with the binding policy from the start of the second financial year of the organisation affected by the legislation, while employers can operate it earlier.
Employers cannot currently specify a date before their 2014 annual general meeting (AGM).
The new rules will have implications for organisations that cannot pass their policy vote in the first year.
BIS has stated that if employers fail their remuneration policy vote in their first year, and do not manage to pass a subsequent vote by the end of that year, they will not be able to pay their directors from the second year of the legislation’s operation until shareholder approval for payments has been received.
Other payment issues that arise from the new draft include:
- BIS has confirmed that payments made after takeovers (when an organisation has delisted) do not have to comply with the policy (unless exceptionally the bidder is listed, when the payment may have to comply with its policy).
- If changes are provided for within the directors’ pay policy, then that should be acceptable and treated as consistent with the policy, but organisations need to be careful to make sure it remains consistent with the policy.
The new draft also means that statutory employment rights are not affected because payments sourced in statutory employment rights are outside the scope of the legislation.
Under the current draft regulations, the contents of the director’s policy pay report must meet the following criteria:
- The summary at the start of the policy report must include key changes from the previous report as well as ‘key messages’.
- When providing set values for projected and past remuneration (to enable comparisons to be made across years and across companies) and total shareholder return (TSR) comparisons, a number of valuation approaches have been amended to encompass the recommendations of the Financial Reporting Council on these issues.
- Performance targets for annual bonuses are now required to be disclosed unless ‘seriously prejudicial to the interests of the company’, but once a bonus has been paid, targets will now have to be disclosed, without any ability to restrict disclosure on commercial confidentiality grounds.
- A specific maximum salary for potential new hires has to be disclosed (although this can be just a general description, not actual limits on other elements of the package).
- All payments (whenever made) to former directors must be reported.