New reporting regulations may mark a sea change in executive reward

Tomorrow marks a significant milestone in executive reward as the government’s reaction to the so-called “shareholder spring” moves from consultation to implementation.  

On 01 October, a number of the provisions of ‘The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013’ take effect along with some related changes to the Companies Act 2006.  

These changes represent the most significant change in the reporting requirements since they were first regulated back in 2002. They will start to impact practice almost immediately. Vince Cable, Secretary of State for Business, Innovation and Skills said:

“This October, new rules will mean companies formally set, agree and implement executive pay policy with their shareholders. These changes will make reporting more transparent, so shareholders and investors are clearer about pay.”

New regulations on executive reward

In summary, the new regulations mean there are additional requirements as to what appears in the annual report and accounts, and shareholders have an increased say in what happens to executive pay.

From 30 September 2013, reports will need to include the following features:

  • The remuneration report will separately include a policy report and the details of what has been done in the reporting year;
  • The policy report will be subject to a binding vote by shareholders;
  • The annual report must give details of the remuneration paid in the reporting period, including a “single figure” for the remuneration paid to each director, as well as some details of what will happen in the following year; and
  • The annual report will be subject to an annual advisory shareholder vote.

GC100, the Association of General Counsel and Company Secretaries working in FTSE 100 Companies, has issued detailed guidance on the new arrangements. 

The impact of the new regulations

Exactly what impact these changes will have remains to be seen. However, it feels as if there is a certain degree of momentum building. There are signs that remuneration committees have recognised and accepted the concern expressed by shareholders.  

For example, amongst the FTSE 100 businesses there is an increasing use of non-financial measures in long-term incentives, as a more balanced view of organisational performance is taken. Similarly, more incentives feature claw back provisions and look at longer term horizons than they previously did.  

Such moves are accompanied by a growing acceptance that executive base pay increases must bear some relationship to the increases the rest of the organisation is experiencing. At the same time, remuneration committees have increasingly looked to make the link between pay and performance stronger and more transparent.

Are these signs that we really are “sharing the pain”? The next couple of years should be interesting.