New Directors’ Remuneration Reporting Regulations

April 17, 2019


On 10 April 2019, the Government laid before Parliament a new set of revisions to the Directors’ Remuneration Reporting Regulations (DRRR or “Schedule8”).

After the wholesale revision to the DRRR in 2013, the regulations remained pretty much unchanged until July, 2018. The 2018 Companies (Miscellaneous Reporting) Regulations then introduced a number of changes to the Companies Act aimed at improving disclosure and corporate governance. Included in this Statutory Instrument were some key changes to the DRRR, in particular:

1. The requirement for UK companies with more than 250 employees to publish, in the form of a table, the ratio of the total pay and benefits for the chief executive to the equivalent figure for UK employees at the lower quartile, median and upper quartile. The requirement, starting with FY 2020, is to report the most recent two years and then steadily build up to a nine-year table over time.

The 2013 regulations required companies to compare the percentage change in the latest year of the remuneration of the chief executive with that of employees of the company taken as a whole; this comparison was to be made for the salary, taxable benefits and annual bonus figures in the single figure table. The 2018 regulations added a pay ratio as well as a pay movement comparison, and added the requirement to report this for a period building up to 9 years.

2. A second important change was to break-out the impact on remuneration of the effect of company share price changes, both in the remuneration table for the year and in the scenarios charts for future remuneration. The old scenario charts ignored share appreciation completely, which proved a serious omission when the forecasts proved wildly low due to stock market movements.  The 2018 regulations went the other way – the scenario modelling had to assume 50% price appreciation over the plan period.

As last year’s changes to the DRRR apply for reports for financial years starting 1 January 2019, no companies have yet had to apply them.  But the new 2019 regulations apply to reports for years starting on 10 June 2019, so companies with a year start between June and December will find themselves adopting both new sets of rules at once.

The Government has introduced the latest changes to the regulations to bring them in line with the 2017 EC Shareholder Rights Directive II (SRD II).  This directive was mainly concerned with flows of information between companies, investors and intermediaries; however, it included some articles aimed at improving the governance of directors’ remuneration.

It is important to note that, as well as requiring certain specific items of disclosure, SRDII mandated the EC to prepare full guidance on the contents of the remuneration report, and the Commission published this guidance on 3 March 2019.  Had BEIS followed this guidance for the UK regulations, the new DRRR would have become very onerous without adding any great benefit for companies or shareholders.  Fortunately, the guidance is not mandatory and the UK Government has chosen to ignore it and only to implement the specific points mentioned in SRD II.  These are limited in their scope.  The changes in the UK DRRR are as follows:

1. The pay movement comparison in the earlier regulations has been extended from one year to five years on a “building up” basis. So there are now potentially five years of pay movement comparisons and nine years of pay ratios to be reported.

2. The pay movement comparison has been broadened from the chief executive to all directors; but not the pay ratio analysis, which is curious. It is not evident that this change provides stakeholders with any insights that go beyond the movement for the chief executive for the additional work involved by the reporting company.   But these changes are necessary to comply with the specific requirements of Article 9b 1. of SRD II

3. The Single Figure table is required to break out separate totals for fixed remuneration and variable remuneration.

4. Where aspects of directors’ remuneration are required to be disclosed under the regulations, it is made clear that this includes the chief executive and deputy chief executive (if any). This prevents the company from hiding the chief executive’s pay by excluding him or her from board membership.

5. The regulation introduces a privacy restriction on including certain categories of personal data. Subject to this, the directors’ remuneration report must be kept available for a period of at least ten years.

6. Throughout the report, the requirement to report has been broadened from “quoted companies” (ie UK companies on the official list of a main exchange) to include “traded unquoted companies” (this covers companies that were previously listed on a main exchange but are no longer listed. It does not include AIM-traded companies.)

7. The regulations expand on the detail that is required to be given about the decision making process for the determination, review and implementation of remuneration policy.

For further information, contact Damien Knight

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