Last updated: 28 November 2016
Welcome to the Squire Patton Boggs UK Executive Remuneration Resource Centre, where you will find links to source materials and commentary on UK executive remuneration issues.
Not surprisingly, 2015, the second year in which listed companies were required to comply with the DRR regulations introduced in 2013, gave rise to fewer clarificatory statements issued by companies in relation to their remuneration policies and a shift in emphasis for shareholders and representative bodies away from remuneration policy concerns to disclosure and transparency concerns.
However, 2016 looks like it will prove to be a very interesting year for many listed companies as they complete their third DRR under the 2013 DRR Regulations and review the policy changes that need to be put to shareholders in 2017. Given the major changes that were introduced in 2013 to the way in which companies are required to deal with executive remuneration in the UK , 2016 will be the year in which the first policies will be reassessed by most companies to see if they are still fit for purpose. Inevitably, the implementation of those initial policies will have thrown up a number of learning points as the challenge of managing remuneration to a set of strict policies for the first time was put to the test. In addition, the various stakeholders and representative bodies have also now had a chance to learn and develop the areas of disclosure, flexibility and clarity that they feel companies need to continue to work on to achieve their goals of transparency and closer links between pay and performance.
Throughout 2016, we will monitor how companies and investors get to grips with issues such as the ever-increasing pressure to disclose more details on key areas like targets, the changes to the tax relief on pension contributions and the shift towards longer performance and ownership periods for long-term incentives. Our main site provides links to all FTSE 350 DRRs and AGM votes. The end of season report from the Pensions and Lifetime Savings Association (previously called the NAPF), together with a letter from the IMA to Remuneration Committee Chairmen, suggested that, although there were positives to be taken from the first year of reporting , it was not all plain sailing. Therefore, as we go through the 2015 season, we will continue to monitor just how disclosures develop in the second year of complying with the DRR Regulations and will be issuing regular updates – both in terms of blog posts and maintaining this Resource Centre. Please bookmark this page and also sign up for alerts so that you have the latest information at your fingertips.
The information has been arranged under five main headings. Scroll down or click on the number to go straight to a topic.
|1||Directors’ Remuneration Reporting|
|2||Voting on Remuneration|
|3||The Listing Rules and The Disclosure and Transparency Rules|
|4||The UK Corporate Governance Code|
Changes to the reporting of directors’ remuneration by UK incorporated companies were first proposed in 2011, with the definitive 2013 DRR Regulations coming into force in August 2013 (and replacing the 2008 DRR Regulations). The 2013 DRR Regulations apply to reports and accounts relating to financial years ending on or after 30 September 2013 and govern the content of the directors’ remuneration report.
The new DRR regime applies to companies incorporated in the UK whose shares are on the Official List (AIM companies are therefore excluded) or officially listed in an EEA state, or dealt on the New York Stock Exchange or NASDAQ. Some AIM companies and companies registered overseas will, in practice, choose to comply with some or all of the requirements imposed by the regime.
The GC100 and Investor Group, formed by the GC100 and Corporate Governance Forum, published guidance on the new DRR regulations in September 2013. An updated version of the guidance was published in November 2013 (albeit dated 14 October 2013) and has been endorsed by BIS. In June 2014 and again in December 2015, the GC100 and Investor Group met and decided not to amend or re-publish its directors’ remuneration reporting guidance. However, the Group published a paper in December 2014 in order to clarify certain aspects of its guidance. (The GC100 is the association for general counsel and company secretaries of companies in the FTSE 100 and the Corporate Governance Forum is an informal network whose members comprise leading UK institutional investors who are committed to best practice principles of governance and stewardship.)
In April 2014, the European Commission announced proposals to alter the Shareholder Rights Directive with a view to overhauling the remuneration disclosure requirements of European listed companies. Our April 2014 blog post, Europe flatters the UK as proposals for a “say-on-pay” are announced, highlights the key changes, as well as the process required to see these proposals become law.
In March 2015, the Department for Business, Innovation and Science (BIS) published a report on research by Manifest into the extent to which companies had complied with the 2013 DRR Regulations as judged from their accounts published in 2014. Further details are given in our blog post. Also in March 2015, the Institute of Chartered Secretaries and Administrators published its paper Good Practice for Annual Reports naming Smith & Nephew and Lonmin as examples of good practice in the FTSE 100 and FTSE 250 respectively.
For more information about developments in the UK DRR regime, please check out the following:
- Our November 2015 post about global policies on executive remuneration issued by Institutional Shareholder Services (ISS), Where in the World? New ISS policies
- The heralding of proposals from the Investment Association to simplify executive remuneration covered in our Plus ca change; amendment to principles of UK executive remuneration post of November 2015
- The long-running saga of Sports Direct’s 2015 Share Scheme, summarised in our post of September 2015, Sports Direct: shareholders shout louder!
- Our July 2015 post about the introduction of clawback in the UK and the US, Clawback- what’s your flavour of who, when and why?
- The extent to which companies got to grips with the DRRs in the 2014 AGM season, highlighted in our March 2015 post, Didn’t they do well? BIS report on compliance with remuneration reporting
Listed companies are required to have an annual binding shareholder vote on the company’s forward-looking policy (as set out in the DRR) and a non-binding shareholder vote on the implementation of the remuneration policy during the year being reported on. The first FTSE100 AGMs to be held under the new regime took place in February 2014: our blog post, A common feature of all four FTSE100 DRRs voted on so far is…?, reported on the first four 2014 FTSE100 AGMs (and the addendums to the DRRs released by each of those companies). Whether or not the binding vote is passed will affect the ability of the company to make payments to directors, including on appointment and termination. Contrast this with the old regime under which companies were only required to submit their remuneration report to a non-binding vote of shareholders each year.
As with the 2013 DRR Regulations, the voting requirements apply to companies incorporated in the UK whose shares are listed on the Official List (AIM companies are therefore excluded), or officially listed in an EEA state, or dealt on the New York Stock Exchange or NASDAQ.
The Enterprise and Regulatory Reform Act, which came into force on 25 April 2013, provides for the new voting procedures. The Act also contains transitional and “grandfathering” provisions relating to a company’s power to make payments to directors pending a binding vote on its remuneration policy being passed by shareholders. Note that the grandfathering protection for pre-27 June 2012 obligations is lost when the relevant contract is “renewed or amended”.
See the BIS frequently asked questions which include details of how the prohibition on unauthorised payments will apply.
The European Commission’s proposals to alter the Shareholder Rights Directive (announced in April 2014) look to incorporate a dual vote for shareholders of EU listed companies, as is the case with UK incorporated listed companies under the UK rules. See our April 2014 blog post, Europe flatters the UK as proposals for a “say-on-pay” are announced, for the key changes.
There are various parts of the Listing Rules and the Disclosure and Transparency Rules that relate to different aspects of directors’ remuneration, including:
- Directors’ service contracts (LR 9.8.8) – disclosures in the annual report and accounts (although see the note below).
- Employees share schemes and long-term incentive plans (LR 9.4) – requirements for shareholders to vote on the introduction of new share plans.
- Employees’ share schemes etc (LR 13.8.11 – 13.8.14) – contents of circulars relating to new share plans.
- Transactions by PDMRs and their connected persons (DTR 3.1) – notification of transactions by directors and persons discharging managerial responsibilities. The restrictions on share dealing imposed by the Model Code (formerly annex 1 to LR 9) were deleted in summer 2016 after the EU Market Abuse Regulation come into force (see our May 2016 blog post New dealing rules for executives of UK quoted companies: implications for share plans).
Given the extensive overhaul of the legislative requirements as to the disclosure of directors’ remuneration, the FCA amended the Listing Rules (which apply to companies with a premium listing) so that companies bound by the 2013 DRR regulations are subject to a lower threshold of disclosure under the Listing Rules. The FCA released a consultation paper in August 2013 on the proposed changes, with Practice Statement 13/11 (which formed the response to the consultation) being published in December 2013.
As a result of the changes, from 13 December 2013, UK incorporated premium listed companies only needed to comply with the 2013 DRR regulations for most remuneration-related disclosures. This is because the changes to the Listing Rules, which essentially removed any items that were already covered by the 2013 DRR Regulations, applied to listed companies with a financial year ending on or after 30 September 2013 that had not published their annual financial report on or before 13 December 2013.
Non-UK incorporated listed companies are now left in the position where they are not required to comply with the 2013 DRR Regulations, so remain subject to the “old” Listing Rules disclosure requirements.
For more information on the requirements under the Listing Rules following this change, see our December 2013 blog post entitled UK FCA simplifies Listing Rules on remuneration reporting.
The UK Corporate Governance Code relies on a “comply or explain” regime to regulate governance issues, including various matters relating to remuneration and remuneration committees. The 2014 version of the Code was released by the Financial Reporting Council on 17 September 2014, and our blog post, Softly Softly Catchee Monkey: New Provisions Under The UK Corporate Governance Code For Directors’ Remuneration, discusses the key changes that are relevant to remuneration committees.
By way of background, the release of the updated Code followed an October 2013 consultation exercise on numerous proposed amendments to the Code. Our October 2013 alert, The FRC’s Damp Squib?, discussed the consultation. There were almost 60 industry responses to the 2013 consultation and, in April 2014, the FRC published these along with a further consultation, which closed on 27 June 2014.
The 2014 version of the Code applies to companies with reporting periods beginning on or after 1 October 2014.
Various organisations issue guidelines and reports from time to time about their requirements with respect to executive remuneration in quoted companies. In addition, some of these organisations, such as the Investment Association (IA, formerly known as the Investment Management Association, IMA; through IVIS), Pension & Investment Research Consultants (PIRC) and Research, Recommendations and Electronic Voting (RREV) are among the organisations that issue recommendations to their members/subscribers as to how they should vote at companies’ AGMs on resolutions relating to executive remuneration. These publications often support the issuers’ commercial service offering as proxy voting advisers and it is worth noting that some proxy voting advisers, notably Manifest, offer similar services without publishing generic guidance.
Please use these links to access the latest versions of the guidelines and reports:
- IA principles of remuneration updated in October 2016. See also
- Corporate Governance and Investment Policy – UK issued by Legal & General Investment Management in September 2016. LGIM sent a letter to remuneration committees in September 2013 confirming its support of the GC100 and Investor Group guidance.
- Remuneration Principles: clarifying expectations published by Hermes Investment Management in November 2016 (after an exposure draft sent to companies in September 2016).
- The GC100 and Investor Group Directors’ Remuneration Reporting Guidance 2016, which offers companies technical and practical guidance on how to put together their directors’ remuneration reports. This has been updated several times since it was first published in 2013.
- ISS UK proxy voting guidelines updated in November 2016. These apply to meetings held on or after 1 February 2017. In the area of remuneration, these build on the NAPF guidelines and are also influenced by the IMA Principles of Remuneration (formerly the ABI guidelines) and the GC100 guidance. They contain guidance specific to smaller companies, such as those on AIM.
- Pensions and Lifetime Savings Association Corporate Governance Policy & Voting Guidelines 2015/16 issued in November 2015 (the National Association of Pension Funds, or NAPF, was re-named the Pensions and Lifetime Savings Association in October 2015). See also:
- The NAPF’s 2015 AGM Season Report published in September 2015.
- How to avoid a bloody nose in the second DRR season: amended NAPF guidelines, our December 2014 blog post on the updated Guidelines.
- Why over what, spirit over letter – the NAPF publishes its verdict on the FTSE 350 2014 AGM season, our September 2014 blog post on the NAPF’s 2014 AGM Season Report.
- Our November 2013 blog post, NAPF goes NAP on remuneration principles, which commented on the changes to the Corporate Governance Policy and Voting Guidelines in 2013.
- An updated Remuneration Principles report, issued in November 2013 jointly with Hermes and various pension funds.
- An open letter sent in March 2013 by the NAPF to the chairmen of the remuneration committees of FTSE 350 companies advocating a stronger link between executive remuneration and company performance.
- PIRC (an independent research and advisory consultancy providing services to institutional investors on corporate governance and corporate social responsibility) “UK Shareowner Voting Guidelines”, which includes sections on remuneration policy and was most recently published in March 2016 (available in hard copy only). The section of the Guidelines that deals with executive remuneration underwent an extensive rewrite in 2014 as a result of the new disclosure regime, with the Guidelines setting out PIRC’s expectations in relation to many of the new disclosure requirements (our March 2014 blog post, PIRC 2014 Shareholder Voting Guidelines – Protecting or promoting?, sets out some of the key points arising from the updated version). PIRC continues to oppose all proposals to introduce LTIPs.
- Guidelines issued by Sharesoc (the UK Individual Shareholder Society) in May 2016. Aimed at restraining pay and simplifying incentives, the guidelines contain 5 pillars (pay level; share ownership; clarity and transparency; pay linkage; and good governance), plus other principles, adapted for smaller companies. Manifest publishes its reports on companies on the Sharesoc website for members to view and members can write their own reports and make comments on the website.
- Sharing Value: Remuneration Committee Guide for Small and Mid-size Quoted Companies, issued by the Quoted Companies Alliance. Sets out governance and disclosure issues for smaller companies, including those on AIM and the ISDX Growth Market. Updated from the 2012 edition in July 2016.
- 2013 RREV UK Remuneration Guidance issued in November 2012. RREV is owned by Institutional Shareholder Services, a US-based research and proxy voting services provider. RREV was originally a joint venture between the NAPF (since October 2015 the Pensions and Lifetime Savings Association) and ISS. It was announced in 2013 that the NAPF’s remaining involvement in RREV would end in June 2014. ISS started issuing its own guidelines in January 2015.
- View from the Forum: Expectations for Executive Pay issued in March 2013 by the Local Authority Pension Fund Forum.
- Guidelines issued by the Trade Union Share Owners Group in March 2013 covering voting and engagement, including a section on directors’ remuneration.
- Enhancing Stewardship Dialogue issued by the Institute of Chartered Secretaries and Administrators in March 2013. This contains a section on strategy and long-term performance, including the linkage of pay to performance.
- The executive remuneration policy issued by the Church of England Ethical Investment Advisory Group in April 2013.
- Guidance on executive remuneration principles and policy disclosure issued by the International Corporate Governance Network in 2012. The ICGN has around 600 members (including institutional investors across 50 markets) and has existed for almost 20 years. Its mission is to raise corporate governance standards worldwide.
- The Chartered Institute of Personnel and Development published “Executive pay: the principles and putting them into practice” in 2010, which sets out ten principles of executive remuneration and questions designed to help companies put these into practice. It is available to members only.