UK-incorporated companies that are a quoted company (as defined in s385 of the Companies Act 2006) or a ‘traded company’ (as defined in s360C of the Companies Act 2006) are affected by new rules regarding directors’ remuneration policy and reporting from 10 June 2019. These new rules were brought in by the Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 (the Regulations) as a result of the UK’s enactment of certain requirements of the EU’s Revised Shareholder Rights Directive.
The Regulations have three principal effects on affected companies’ remuneration policy and reporting:
- They add to and amend the requirements that already apply to Quoted companies (eg those with shares with a Standard or Premium listing on the London Stock Exchange, with shares officially listed in an EEA state or with shares listed on the Nasdaq or New York Stock Exchanges),
- They extend the amended requirements in full to traded companies (eg those with shares listed on a regulated market in an EEA state, including those with shares listed on the Specialist Fund Segment of the London Stock Exchange), and
- They bring into the definition of ‘director’, for the purposes of remuneration reporting, individuals who carry out the functions of Chief Executive Officer and Deputy Chief Executive Officer (whatever their titles) even if those individuals are not statutory directors of the company.
These new rules are separate from (and different to) those introduced for periods beginning on or after January 2019 that, among other things, require the disclosure of CEO pay ratios in the directors’ remuneration report.
Impact on the directors’ remuneration policy
For many companies, the most pressing consideration will be the Regulations’ effect on remuneration policy.
Under the directors’ remuneration reporting (DRR) requirements, the remuneration report must include a remuneration policy containing details of the components of the remuneration packages of the company’s directors. The remuneration policy is forward-looking and must be approved by investors by an ordinary resolution at least once every three years, or sooner in the event of revisions to the remuneration policy (or a shareholder vote against approval of the annual remuneration report in certain years). The Regulations require all new policies put forward for approval on or after 10 June 2019 to include:
- Certain additional detail on when shares indicatively awarded to directors may be granted or exercised, in particular by providing information on vesting periods, and on any holding or deferral periods
- An indication of the duration of directors’ service contracts, and
- An explanation of the decision-making process through which the policy has been determined, and highlight key changes compared to the previous policy.
In addition, the company must put the date and results of the shareholder vote on the new policy on its website as soon as reasonably practicable and, if the company loses the shareholder vote on the policy, it must bring a revised policy to another vote within a year.
March 2019 year-end companies that are seeking to have a revised remuneration policy approved at their upcoming AGMs will need to consider these new requirements, even if they were not included in the version of the policy that was included in their signed annual report for that year. Traded companies, which are newly brought into the scope of these requirements by the Regulations, have some transitional provisions.
Impact on the directors’ remuneration report
For periods beginning on or after 10 June 2019, the following changes are introduced for the directors’ remuneration report itself:
- The report must compare the annual change of each director’s pay to the annual change in average employee (of the company only, not employees of the wider group) pay, over a rolling five-year period
- The report must show the split of fixed and variable pay for each director, as two additional columns to the existing ‘Single Figure’ table, and
- The report must set out any changes made to share options granted or offered and the main conditions for the exercise of these rights including the exercise price and date, compared to the previous year.
In addition, the Regulations place some restrictions on the nature of personal information that may be included in the directors’ remuneration report and stipulate that the report must be freely available on the company’s website for ten years.
Read Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019. The Department for Business, Energy & Industrial Strategy (BEIS) has published some useful FAQs to help companies apply this new legislation.
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