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Consultation on directors’ pay

The political hot potato of directors’ pay is back in the news, with the publication of the Department for Business Innovation & Skills’ consultation paper on regulations governing remuneration for directors of all quoted companies.

The proposals are intended to encourage greater engagement between shareholders and companies by giving the shareholders access to better quality information. The consultation seeks views on the proposals to increase the transparency in pay reporting and on draft regulations which will determine the content of directors’ remuneration reports. The new provisions would take effect for companies whose financial year ends after October 2013.

Under the proposed regulations the directors’ remuneration report would consist of two parts: a policy report which would set out the company’s policy on future remuneration and potential payments; and an implementation report which would detail how the policy has been implemented in the previous year.

The policy report would require shareholder approval at least every 3 years and would include:

  • A table setting out key elements of pay and supporting information
  • Information on service contracts
  • Graphs showing amounts directors will be paid in different scenarios for performance that is above, on and below target
  • Information on the overall pay spend compared to profit, dividends and overall expenditure
  • Termination payment policy
  • Material factors that have been taken into account when setting the pay policy – employee pay and shareholder views

The implementation report would have to be issued annually and would be subject to an advisory shareholder vote. It would include:

  • A single total figure of remuneration for each director
  • Total pension entitlements for each director
  • Termination payments
  • Detail on variable pay awarded
  • Total shareholding of directors
  • Comparison of company performance and CEO pay

The Government is inviting responses to the consultation which can be found here and the deadline for responses is 26 September 2012.

There has been some criticism that the proposals have been significantly watered down from what was initially envisaged. It would be good to get your views on whether it is likely to be an effective mechanism for ensuring shareholders views are reflected and in particular whether it will serve to restrain pay awards.

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