Remuneration proposals aimed at enhancing shareholder rights

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The Government has published a consultation on executive remuneration. The proposals, which will apply to all UK incorporated companies on the Official List (not AIM) and which are expected to come into force on 1 October 2013, include:

An annual binding vote on future remuneration policy: including salary increases; material changes in a directors' benefits and pension arrangements and discretionary payments. The paper states that “Shareholders would not be able to use the vote on policy to ‘undo’ basic salary or pension agreements already entered into, or the award of deferred variable pay granted in previous years.

The Government is seeking views on the level of support required for this resolution and is suggesting a threshold above 50% plus one vote but potentially below 75% as it recognises that in some companies, this would give a single shareholder a veto on future remuneration policy.

If the vote is lost on the resolution, a company would be expected to “fall back” on the last approved policy or hold a general meeting, within 90 days of the AGM, where alternative proposals would need to be proposed.

Existing contracts which enable a director to participate in a particular type of remuneration scheme, or which specify the level of remuneration that a director could receive in particular circumstances, will need to be amended before the legislation is in force (expected 1 October 2013), to ensure that they do not subsequently conflict with the company’s approved remuneration policy. In the future, no contract will be able to contain such provisions. Directors appointed to the board during the course of a year should be offered remuneration packages consistent with the company’s approved remuneration policy.

Remuneration reports will be split into a section on future pay policy and potential payouts and a section on actual awards and the way in which remuneration policy has actually been implemented over the year.

An annual advisory vote on the implementation of previous remuneration policy: shareholders will be able to vote on the implementation of the company’s remuneration policy for the previous financial year, including actual awards made. Although the vote would be advisory only (not binding), the Government is proposing that if a company fails to secure support from 75% of the votes cast, it will be required to issue a statement to the market within 30 days detailing (i) the number and votes for, against and abstained on the resolution (ii) the main issues raised and (iii) how the company proposes to address these issues.

Binding vote on exit payments:  the Government is proposing to introduce a new provision giving shareholders a binding vote (requiring a simple majority) on any exit package which exceeds the equivalent of one year’s base salary where a director’s contract has been terminated early and without due notice. This will not affect directors who leave having served their notice period, provided that exit payments made under other arrangements eg LTIPs do not exceed one year’s base salary. If the vote is lost, the company would be unable to pay the individual an award beyond the basic limit. Future service contracts and existing arrangements which provide for exit payments in excess of one year’s base salary should state that they are conditional on shareholder approval.

There will be no new requirement for shareholder approval for notice periods of more than a year but the legislation will make it clear that the vote on exit payments will effectively override any vote on notice periods.

Adam Bogdanor, corporate finance partner, said that: “Taken together, these proposals would give shareholders additional tools to hold Boards to account on remuneration policy. Whilst the Government does not expect a significant increase in shareholders voting down resolutions on pay, it hopes that these tools will encourage greater engagement between Boards and shareholders at an earlier stage.

 

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