Remuneration reporting as part of corporate governance

As part of corporate governance rules, certain companies are required to report annually on their directors’ remuneration. Rules on directors’ remuneration have gradually been introduced over the years, initially as a result of concerns from shareholders and other investors regarding high salaries of company directors despite poor profits.

What are the corporate governance rules relating to remuneration?

Large and medium sized companies

Under schedule 5 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, medium and large companies (ie those not subject to the small companies regime) are required to report on “the aggregate amount of remuneration paid to or receivable by directors in respect of qualifying services”. Additionally, they must report on aggregate gains from share options, incentive schemes, and other company contributions.

Small companies

Small companies (ie those subject to the small companies regime) are governed by schedule 3 of the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008. This requires that companies report on “the amount of remuneration paid to or receivable by directors in respect of qualifying services” in addition to various incentive schemes and other company contributions.

PLCs

According to section 420 of the Companies Act 2006: “The directors of a quoted company must prepare a directors’ remuneration report for each financial year of the company.” The content of this remuneration report is determined by the relevant regulations outlined above and the Listing Rules (see below).

Failure to prepare a directors’ remuneration report constitutes an offence. Anyone who was a director of the company immediately before the end of the period for filing accounts and reports for the financial year in question will be deemed to have committed an offence if they did not “take all reasonable steps for securing compliance with that requirement [to prepare a report]”.

Listing Rules

The Financial Reporting Council (FRC) manages the UK Corporate Governance Code. Section 5 of the Code sets down guidelines for executive remuneration. One of the principles states: “Remuneration policies and practices should be designed to support strategy and promote long-term sustainable success. Executive remuneration should be aligned to company purpose and values, and be clearly linked to the successful delivery of the company’s long-term strategy.” All companies with a Premium Listing of equity shares in the UK are required to report in their annual report and accounts on how they have applied the Code, in accordance with the Listing Rules of the Financial Conduct Authority (FCA).

Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019

The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 made certain changes to the existing rules regarding remuneration of company directors. They amended the Companies Act 2006 and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. The changes notably included:

• Widening the scope of the existing rules on remuneration reporting to include unquoted traded companies
• Requiring the remuneration of the CEO and any Deputy CEO to be reported even if they are not statutory directors sitting on the board of the company

The rules, which sought to tighten up corporate governance, were divided into policy and reporting aspects. Under the rules, the Remuneration Policy must:

• Provide certain details on when shares indicatively awarded to directors may be granted or exercised, in particular by providing information on vesting periods, and on any holding or deferral periods;
• Give an indication of the duration of directors’ service contracts;
• Set out the decision making process through which the policy has been determined, and highlight key changes compared to the previous policy;
• Include the date and results of the shareholder vote on the new policy on its website as soon as reasonably practicable;
• Bring a revised policy to another vote within a year if the company loses the shareholder vote on the policy.

The Remuneration report must:

• Compare the annual change of each director’s pay to the annual change in average employee pay, over a rolling five year period;
• Show the split of fixed and variable pay for each director, as two additional columns to the existing ‘Single Figure’ table;
• Set out any changes made to share options granted or offered and the main conditions for the exercise of these rights including the exercise price and date, compared to the previous year;
• Be freely available on the company’s website for ten years;
• Not include any sensitive personal data, revealing racial or ethnic origin, political opinions or religious beliefs.

A document about the Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019 from the Department for Business, Energy & Industrial Strategy (BEIS) answers some frequently asked questions.

Please visit www.linnear.com to find out how we can help you to ensure your remuneration reporting is compliant.