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Are You Prepared for Shareholder Votes on Executive Pay?

Tuesday, 14 January 2014

Since October 2013 listed companies have been obliged to give shareholders a binding vote on directors’ pay. Although the new rules were introduced in 2013 via The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, many companies will not yet have faced the practical realities of a binding shareholder vote.
As companies reach their financial year ends, the issue will become more prominent for remuneration committees.

What Has Changed?
Shareholder votes on remuneration policies are nothing new. Since 2002 shareholders have been able to vote on executive pay packages but those votes were not binding.
In reality the previous regime was relatively impotent, with average executive pay scaling new heights year after year. Currently executives receive nearly 69 times the pay of their average employee which has jarred the public consciousness heavily in these austere times.
In addition, institutional shareholders finally began to find their mettle in 2012 with six remuneration reports being voted down in what observers of the AGM season dubbed the “shareholder spring”.
Riding the wave of popular support for restraint on executive pay, Vince Cable, the Business Secretary sought to introduce new rules including a binding shareholder vote on executive pay.

What Are the Practical Effects?
Companies will need to consult carefully with key shareholders to ensure that their proposals for executive pay are in line with expectations and company performance.
A binding vote on remuneration policy will need to be held every three years. Once a policy is approved it must be adhered to for the subsequent three year period; maximum pay figures for the period must be included so a degree of flexibility must be balanced with shareholder certainty. Companies that lose a vote will need to hold an extraordinary general meeting shortly afterwards to try and get an amended policy approved. Directors that authorise payments that have not been approved will be personally liable.
Thereafter a single figure must be published each year showing how much executives have been paid in the past year. This must include termination payments to exiting directors. Shareholders will be given an advisory vote on the annual remuneration figures.

These measures mean that companies will need to ensure that their remuneration reports are amended to reflect the new disclosure requirements. There will need to be a ‘policy’ section and an ‘implementation’ section containing all the relevant information.
Companies will also need to review how the new rules might affect existing provisions contained in director’s contracts of employment.

For more information please contact Peter Gourri today by email or by telephone on 0207 611 4848.