The executive pay changes are being implemented via amendments to the regulations governing listed companies directors’ remuneration reports. These regulations apply to UK incorporated companies whose shares are quoted on the Main List of the London Stock Exchange, the New York Stock Exchange, NASDAQ or a recognised stock exchange in the European Economic Area. AIM are exempt from the new regime.
Option A
Options B and C offer some flexibility in calculating the pay ratios. Both options allow companies to identify, on an indicative basis, three UK employees at median, 25th and 75th percentile using existing pay data such as gender pay data (Option B) or any other recent existing data (Option C), without necessarily having to perform the calculation under Option A for all employees.
Annual statement from Remuneration Committee Chair |
Remuneration committees will be required to provide a summary explanation of any discretion used in respect of executive remuneration outcomes reported in the year. |
Annual remuneration report – notes to single figure table |
In the notes to the single figure table, there will be a requirement to provide:
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Remuneration policy |
In the next new remuneration policy, there will be a requirement to provide an illustration of the impact of potential future share price increases on executive pay outcomes that are linked to performance periods of more than one financial year (e.g. LTIP awards), assuming share price growth of 50% over the period. |
We support the move to ensure that remuneration committees are aware of, and take account of, remuneration levels across the wider workforce. The use of a pay ratio, and how it moves over time, is intended to help committees in considering this. Companies should focus on providing a clear narrative around how executive pay outcomes are aligned with business performance, as well as how success has been shared more widely across the organisation.
In light of the Investment Association’s call for early voluntary disclosure of pay ratios last year, companies will have to decide whether they disclose their ratios prior to 2020, given that the methodology has now been published.
Companies should be aware of the greater transparency required around the actual and potential impact of share price performance on long-term incentive outcomes, as well as clearer reporting on if and how remuneration committees have exercised discretion when considering and approving executive pay outturns.
Directors’ duties reporting
The directors of large companies will be required to report on (and publish on their website) how their directors have discharged their statutory directors’ duties (for example, how they have taken employee and other stakeholder interests and the company’s environmental impact into account when running the company).
Large, private and unlisted companies
Large private and unlisted companies will have to include a statement as part of their Directors’ Report stating which corporate governance code, if any, has been applied and how. Companies with more than 250 employees will also be required to explain how they have engaged with employees during the year, and had regard to employees’ interests in managing the business.
The draft legislation can be viewed in full here.