Under the new format, remuneration reports must include a letter from the chairman of the remuneration committee outlining any significant changes during the reporting year, a forward-looking policy report and an annual report on remuneration setting out how the organisation’s remuneration policy was implemented during the year.
The policy report, which must be voted on by shareholders at least every three years, is entirely new and must contain details of the organisation’s remuneration policy. In formulating their policy, organisations must ensure it is comprehensive, yet sufficiently flexible to last. As an organisation can only make payments that comply with its policy, it should stress-test different scenarios to evaluate whether its policy is broad enough.
One particularly challenging aspect is the extent and use of discretion in relation to the different components of pay. Discretion may be key where an executive leaves or the organisation is taken over and the business wants to have scope to decide the quantum of any bonus or share awards.
Although the overall framework for the annual report on remuneration is broadly similar to previous requirements, more detailed information must be included and the regulations specify how that information must be presented.
Guidance has been issued by the GC 100 (the Association of General Counsel and Company Secretaries working in FTSE 100 companies) and the Investor Group (a network of leading UK institutional investors) members on the level of detail and type of information that should be disclosed. However, there are a number of areas where practice is developing almost daily and not always consistently. Also, certain institutional investors have issued their own views on the regulations.
In setting their remuneration policy, employers must strike a balance between shareholders having sufficient information to take a view on how to vote and retaining operational flexibility.
Barbara Allen is a corporate partner at Stephenson Harwood
