Following closely on the heels of its announcement of a package of proposals  intended to curb executive remuneration, the U.K. Government recently published a consultation paper focusing on the content of remuneration reports of UK-incorporated quoted companies that would disclose the compensation of directors, including executive directors.  While much of the consultation paper simply echoes the announcement, which we summarized in our memo, it is fairly detailed and merits a close read.  Here are selected highlights:

  • Remuneration reports would have two parts:
    • A policy report setting out all elements of a company’s remuneration policy and key factors that were taken into account in setting the policy. This part of the report will only be required when there is a shareholder vote on the policy.
    • An implementation report on how the policy was implemented in the past financial year, setting out actual payments to directors and details on the link between company performance and pay.
  • The policy report would cover the following six elements:
    • Tabular disclosure of the key elements of pay and supporting information, including how each supports the achievement of the company’s strategy, the maximum potential value and performance metrics (the consultation paper helpfully provides an example in an annex at the end). This table would be accompanied by a narrative explanation of whether the remuneration policy for directors differs from the policy for other employees and, if so, an explanation of why.
    • Information on employment contracts.
    • Scenarios for what directors would get paid for performance that is above, on or below target, presented in graphical form.
    • Information on the percentage change in profits, dividends and overall spending on pay.
    • The principles on which exit payments would be made, including how they would be calculated, whether the company would distinguish between different kinds of departures or the circumstances of any exits and how performance would be taken into account.
    • Material factors that have been taken into account when setting the pay policy, specifically employee pay and shareholder views.
      • While the U.K. Government did consider requiring the disclosure of a CEO-median employee pay ratio, it concluded that this information would not be meaningful and, instead, proposed that the policy report set out information including the percentage increase in pay of the workforce and the percentage increase in pay of the CEO.
      • The policy report would also set out how shareholder views were taken into account in setting remuneration policy.
  • The implementation report would cover the following nine elements:
    • Single total figure of remuneration for each director, presented in a specific tabular format disclosing: salary, benefits, pension, bonus, long-term incentives and total.
    • Performance against metrics for long-term incentives, including the following details:
      • What the performance conditions were and the relative importance of each.
      • Within each performance condition, the targets originally set and the potential level of award achievable.
      • For each performance condition, how the company performed against the targets set for that condition.
      • Where the remuneration committee had discretion, how it exercised that discretion.
      • The resulting level of award.

For those elements of pay that were awarded in relation to the financial period being reported on and were subject to deferral, the implementation report would also set out the percentage deferred and whether it was deferred in cash or shares.

  • Total pension entitlements (for defined benefit plans).
  • Exit payments made in the previous year, with further detail including:
    • The level of compensation received broken down into the key elements.
    • An explanation of how each element was calculated.
    • An explanation of how the decisions made relate to the policy on exit payments.
  • Variable pay awarded in the previous year, including the following details for awards made in the current year under long-term incentive plans:
    • Scheme – the type of long-term award (e.g., shares, matching shares, options).
    • Basis of award – calculation of face value (e.g., X times base salary).
    • Face value.
    • Vesting maximum if above face value.
    • Percentage of the award that would vest at threshold performance.
    • Date performance period ends.
    • Summary of performance criteria if not set out elsewhere.
  • Total shareholdings of directors.
  • Chart comparing company performance and CEO pay.
  • Information about who has advised the remuneration committee.
  • Shareholder context, meaning:
    • How shareholders voted on both the binding vote and the advisory vote at the previous year’s annual shareholders meeting, set out as a percentage of votes cast.
    • Percentage of shareholder base that abstained.
    • Reasons for significant dissent where known.
    • Action taken by the remuneration committee in response.
  • In addition, specified sections of the remuneration report, including the single total figure for remuneration, would be required to be audited.
  • The remuneration report would be prefaced by a statement to the shareholders from the Chairman of the Remuneration Committee summarizing the key messages on remuneration and the context in which decisions have been taken.  The proposal declined to prescribe a form for this letter.
  • Consistent with the current regime, the proposal would apply to all UK-incorporated quoted companies and would apply to the remuneration of all directors, with the intent that it would be most relevant for executive directors.  The U.K. Government intends to work with the UK Listing Authority to consider whether the requirements of the Listing Rules need to be reviewed.
  • The consultation closes on September 26, 2012 and the proposed provisions would take effect for companies whose reporting years end after October 2013.
  • These proposed regulations would replace, and not supplement, the existing disclosure requirements of remuneration reports.  Specifically, they would revoke and replace Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (S.I. 2008/410).