Reforms to shareholders’ role in executive pay come in

Reforms proposed by the Department for Business, Innovation and Skills (Bis) on executive pay came into force on 1 October 2013.

As a result of the reforms shareholders of around 900 UK-quoted companies will now be better prepared to hold companies to account. They will have access to clearer information on the pay of top executives and will be able to exercise their new legally binding vote on executive pay.

The main changes to the executive pay reporting regulations include:

  • A pay policy that will be subject to the new legally binding vote. All payments, including exit payments, must be covered by the policy.
  • An illustration of the level of awards that could pay out for various levels of performance, meaning pay information is presented in a more understandable format.
  • All elements of directors’ pay will be reported in a single, cumulative figure. The regulations define how this should be calculated so that all companies are consistent in their approach.
  • Improved disclosure on the performance conditions used to assess variable pay of directors.

In addition, changes to simplify and strengthen companies’ non-financial reports also come into force. These are aimed at strengthening the ability of shareholders to hold quoted companies to account over the course of the financial year.

From 1 October, the reports will include additional information on human rights issues, the gender of the board and senior management, and disclosures on greenhouse gas emissions.

The main changes include:

  • The introduction of a strategic report. This aims to help companies tell their story, starting with their strategy and business model, the principle risks and challenges they have faced and opportunities in the coming year.
  • A statement of the gender balance at board level, in senior management and in the company as a whole. This aims to focus attention on board diversity and the company’s ability to retain and develop its most talented employees.
  • New disclosures on greenhouse gas emissions. This aims to encourage the companies to think about ways in which these can be reduced.
  • Information on human rights issues that could affect the business.

The narrative reporting changes will affect all reports produced in relation to financial years ending on, or after, 30 September 2013.

Vince Cable, business secretary, said: “Over the last decade, the pay of our top executives has quadrupled, but it has not always been an indication of how well a particular company has performed.

“At the same time, company reports have become increasingly complicated without giving shareholders the right sort of details they need in order to evaluate performance.

“The signs are that we are moving in the right direction and in the last year we’ve seen some restraint. Our reforms mean shareholders will now no longer be kept in the dark. They now have powerful tools for every shareholder, big or small, to speak up and challenge companies over excessive pay and prevent big bosses being rewarded for failure.”

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Gillian Chapman, head of employment and incentives at law firm Linklaters, added: “These are the most significant changes in this area since the introduction of the original disclosure regime ten years ago.

“Companies are now preparing to comply with the new rules for the first time. There will be some tricky issues to navigate through: honouring existing contractual obligations, transition to shareholder approved policies and preparing the single figure pay disclosures for each director.”