27 Jun 2012 03:52 PM

The Government today published draft regulations determining what companies must disclose in pay reports. These will fully replace existing rules and are designed to create a robust framework within which directors’ pay is set, agreed and implemented. The revised regulations will:

streamline company disclosure requirements so that reports are focussed on making the link between pay and performance crystal clearintroduce a new requirement to report the total pay directors received for the year as a single figureensure shareholder engagement is sustained over the long term.

The regulations follow last week’s announcement by the Business Secretary, Vince Cable of the most comprehensive and radical reform of the governance of directors’ pay in a decade, including the introduction of a new binding vote on company pay policy.

Business Secretary Vince Cable said:

“Over the last decade directors’ pay has quadrupled with no clear link to company performance. At the same time company reports have become increasingly complex without giving shareholders the information they need.

“These regulations will significantly improve reporting. For the first time companies will be required to set out every element of pay that a director could be entitled to and how it supports long-term company strategy and performance. If the policy isn’t specific enough, shareholders will have a legally binding vote they can use to reject it.

“Companies will also have to clearly disclose directors’ pay in a single figure. This means that it will no longer be possible to mask what they are actually earning.

“I expect shareholders to use this new framework to maintain recent activism and challenge companies to inject greater pay discipline and prevent rewards for failure.”

To support the new shareholder voting regime, remuneration reports will in future be split in two parts:

A forward-looking policy report , which will be subject to the binding shareholder vote. Once approved, the company will only be able to make payments within the limits it allows.

For the first time, companies will be required to set out every element of pay that a director could be entitled to and how it supports the achievement of strategic objectives, the maximum value and performance measures that will be applied. The report will also set out: Scenarios for what directors will get paid for performance that is above, on and below targetInformation on the percentage change in profit, dividends and the overall spend on payPrinciples on which exit payments will be made, including how they will be calculated and how performance will be taken into accountInformation on employment contractsFactors the company has taken into account when deciding on pay policy, including employee pay levels and views.

A report on how the policy was implemented , which will be subject to an annual advisory vote.

This report will include details of actual payments made, set out as a single figure for the total pay directors received for the year. The figure will cover all rewards, including bonuses, long term incentives and pension provision. For the first time this will allow shareholders to make comparisons between the pay directors receive year-on-year, and between companies.

The report will also include:

Information on how well companies performed against conditions and how this impacted on the overall level of payTotal pension entitlements (for defined benefit schemes)Exit payments awarded in the reporting periodDetails on the potential future value of new variable awards made in yearTotal shareholdings of directorsA comparison between company performance and the Chief Executives’ payInformation about who has advised the remuneration committeeDetails on how shareholders voted at the previous AGM and any action the company took in response.

In line with good policy making, the Government is inviting comments on the draft regulations before they become law.

The regulations are expected to come into effect from October 2013, alongside primary legislation on binding votes. Today the Government has also tabled amendments to the Enterprise and Regulatory Reform Bill that will allow the new voting regime to become law.



Notes to editors:

The Consultation on the draft regulations closes on 26 September 2012 and is available at: http://www.bis.gov.uk/Consultations/directors-pay-revised-remuneration-reporting -regulationsFor variable elements of pay, the single figure will reflect actual pay earned rather than potential pay awarded. This includes:

· full bonuses awarded for the reporting period; and

· long term incentives where the reporting year is the last financial year of the performance cycle.

The Enterprise and Regulatory Reform (ERR) Bill was introduced on 23 May 2012. At that point the Government was still considering the responses to the consultation on enhanced shareholder voting and was not in a position to include a full set of clauses. The Bill is now in Committee stage and it is anticipated that the amendments introduced today will be debated before parliament breaks for the Summer recess.

The amendments to the Bill can be found at http://discuss.bis.gov.uk/enterprise-bill/

The amendments include details of how the new binding vote will interact with directors’ contracts. Any payments made under obligations in contracts entered into, amended or renewed after 27 June 2012 will need to be consistent with the primary legislation at the point it takes effect and those payments are made.

The Government is also today publishing a summary of the responses received during the consultation launched in March 2012, Executive Pay: Shareholder Voting Rights. http://www.bis.gov.uk/assets/biscore/business-law/docs/e/12-918-executive-pay-co nsultation-shareholder-voting-responses

The Government's economic policy objective is to achieve 'strong, sustainable and balanced growth that is more evenly shared across the country and between industries.' It set four ambitions in the ‘Plan for Growth’ (PDF 1.7MB), published at Budget 2011: To create the most competitive tax system in the G20To make the UK the best place in Europe to start, finance and grow a businessTo encourage investment and exports as a route to a more balanced economyTo create a more educated workforce that is the most flexible in Europe.

Work is underway across Government to achieve these ambitions, including progress on more than 250 measures as part of the Growth Review. Developing an Industrial Strategy gives new impetus to this work by providing businesses, investors and the public with more clarity about the long-term direction in which the Government wants the economy to travel.

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