BIS publishes paper on how companies have responded to directors’ remuneration reporting requirements

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10 Mar, 2015

The Department for Business, Innovation and Skills (BIS) has published a paper considering how companies and shareholders have responded to new requirements on the reporting and governance of directors’ remuneration introduced in the Large and Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (“the Regulations”).

The regulations, which were approved in August 2013 and apply to quoted companies, changed the requirements for the contents of the directors’ remuneration report, adding some significant new disclosures, particularly a ‘single figure’ for the remuneration of each director. They are effective for periods ending on or after 30 September 2013.

BIS examined the level of compliance with the Regulations for a randomly selected sample of UK incorporated companies listed on the London Stock Exchange.  The random sample was drawn from the full population of all UK incorporated companies main listed in London (ex-investment trusts) for which the most recent Annual General Meeting (AGM) vote results had been disclosed in respect of meetings held since the 1 October 2013.  A total of 93 companies was selected; 38 companies with more than 20,000 employees (group 1), 38 companies with fewer than 20,000 employees (group 2), and 17 companies meeting the EU definition of small or medium-sized enterprises (SME’s) (group 3). 

The remuneration reports and remuneration policy sections of the companies’ Directors’ Remuneration Reports, published ahead of their Annual General Meetings were examined against 19 questions and compliance assessed on a pass/fail basis.  In addition to the pass/fail assessment of compliance, the paper also provides a qualitative assessment of compliance with aspects of the regulations which require companies to set out:

  • how pay and employment conditions of employees were taken into account when setting the policy for directors’ remuneration and whether, and if so how, employees were consulted; and
  • whether, and if so how, the views of shareholders were taken into account when setting the policy for directors’ remuneration.

The report found that “most companies in the sample complied with the majority of the requirements in the regulations” with 11 instances of non-compliance.  The sample of group 3 companies produced the “majority of compliance issues with the Regulations in the pass/fail section”.

Key other findings include:

  • “Notable levels of non-compliance" regarding the requirements to provide details of pension entitlements, information on payments to past directors, information on payments for loss of office and future salary policy.  However, as the first three of these disclosures are subject to audit, BIS comments that “it is likely that the lack of explicit disclosure means that the company has no relevant information to disclose”.  In this respect, BIS would recommend that the guidance on these three areas be adjusted to promote that companies should “provide positive confirmation that no information can be disclosed” as this would “enhance transparency and promote trust”.
  • A “significant level of non-compliance” with the requirement to specify clearly, in monetary terms or otherwise, the maximum future salary that may be paid under the remuneration policy.  The report highlights that there may have been “confusion” between the guidance that invites companies to ”describe the considerations the remuneration committee will take into account for increasing salaries during the remuneration policy period” and the requirement that “the maximum must be explained”.  Again, BIS suggest that the guidance in this area might be adjusted “to ensure that the maximum amount must be explained irrespective of additional disclosure of any considerations the remuneration committee takes into account in determining proposed increases during the policy period”.
  • The “vast majority” of companies had complied with the requirement to explain how workforce pay is considered in setting directors’ pay.  Only 9 companies did not have a statement to this effect or did not mention the consideration of workforce pay in setting directors’ pay.  However, findings indicate that “there is some variety in the quality” of reporting; some mentioned making a consideration and others how this consideration worked in practice.  The former represented “nearly a third” of the population.  Similar results were found regarding compliance with the requirement to contain a statement as to whether and if so and how shareholders views have been taken into account when setting directors’ remuneration.
  • The “majority” of companies complied with the requirement to disclose comparisons of changes in CEO pay with those of employees.  Most companies in the sample either compared CEO pay with all employees in the company, all employees in the UK or all employees in the UK and other main markets of operations. 

The report also examines shareholder voting results of the remuneration policy and remuneration report votes from the 2014 AGM season, in the context of the four previous years’ votes, with a particular focus on turnout and dissent levels.  Additionally, analysis is provided of recent developments in the structure and levels of directors’ remuneration more generally.

The press release and the full report are available on the BIS website.

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