The Government proposes that shareholders of UK incorporated quoted companies should have a binding vote on the company’s future remuneration policy which will replace the current advisory vote on the directors’ remuneration report. At the start of the year, in one section of the directors’ remuneration report, companies will have to set out the proposed pay policy for the year ahead, including potential payouts and the performance measures to be used. Any proposed changes to the remuneration policy will be contingent on the resolution being passed and companies will have to act within the scope of the remuneration policy agreed by shareholders at the start of the year. If the binding vote on the company’s future pay policy is not passed at the AGM, the company will have either to operate within the last pay policy approved by shareholders or call a further general meeting to vote on a revised remuneration policy, as circulated to shareholders in advance of that further general meeting. Such a meeting will have to be held within 90 days of the AGM at which the original resolution was voted down.
The Government is considering the level of support that should be required to pass the annual binding vote on the future remuneration policy. It considers that a threshold of between 50 per cent and 75 per cent may be appropriate to ensure that a single shareholder with 25 per cent or more of the total voting rights in a company could not, alone, reject a special resolution.
The Government anticipates that most shareholders will want to allow the company’s remuneration policy to permit the remuneration committee some discretion and flexibility. However, so that shareholders can see that their views have been taken on board, the Government proposes that companies will need to report on how shareholders voted on all pay resolutions in the previous year, how shareholder votes have subsequently been sought and how the company has responded and adapted its remuneration policy accordingly.
The Government hopes that a binding vote on future remuneration policy will encourage better quality engagement between companies and shareholders at an early stage in the devising of the remuneration policy. It suggests that if the binding vote is not passed and the company decides to continue with its previous year’s remuneration policy which shareholders are unhappy with, possibly because they no longer deem it fit for purpose, shareholders will need to express their dissatisfaction when voting on the re-election of directors, for example. However, if the binding vote is not passed it may be difficult for the company to resort to its previous remuneration policy as much common policy is likely to run through the remuneration policy year on year. As a result, a “no vote” is likely to leave the company not really knowing what is and is not acceptable to its shareholders with respect to, for example, the detailed operation of its long-term incentive schemes (LTIPs).
In future, no director’s service contract will be able to guarantee that a director has the right to participate in a particular type of remuneration scheme, or to specify the level of remuneration that the director could receive in particular circumstances, as this will depend on shareholders agreeing the remuneration policy, and so the scope of potential rewards, on an annual basis. As a result, some existing service contracts and other arrangements may need to be amended to ensure that provisions relating to variable remuneration do not conflict with the ability of shareholders to approve the company’s remuneration policy annually. Companies are likely to have until 1 October 2013 to amend any service contracts and other arrangements to accommodate this.
Companies will need to avoid entering into any new arrangements with respect to remuneration which could give an individual director legal entitlements which may subsequently come into conflict with the remuneration policy agreed with shareholders. If a company does agree a contractual term which is inconsistent with the remuneration policy approved by shareholders, then the directors who entered into or authorised the contract will be liable to account to the company for any loss, and the director who receives any payment will have to hold it on trust for the company.
The proposals may have an impact on recruitment since companies that recruit a director during the course of the year will have to offer that individual a remuneration package consistent with the remuneration policy that has already been approved by shareholders. Companies will have more freedom to negotiate a pay deal with a new director if their approved remuneration policy permits such flexibility. However, they will be unlikely to offer generous sign on bonuses or offer inflated packages, which may assist in slowing down any pay ratcheting.
The Listing Rules already set out requirements with regard to shareholder approval of LTIPs. The Government envisages that the proposed forward looking policy statement in the annual directors’ remuneration report will explain how the company proposes to use its discretion to determine the actual performance criteria, targets and potential levels of award for individual directors in the year ahead within the broad framework for LTIPs which shareholders have already approved or have been asked to approve. The outcome of the binding vote on the proposed remuneration policy will have no direct impact on the shareholder vote approving a new LTIP, or on the status of an LTIP that has already been approved by shareholders, but it will give shareholders an opportunity to approve the details of how such schemes will operate in practice for directors for the year ahead.
From the point of view of the company, although shareholders are likely to have previously approved the parameters of the LTIP arrangements, the remuneration committee has always been able to exercise its discretion each year with respect to details such as levels of grant and performance criteria without the need for shareholder approval. The proposals will effectively give shareholders the right in future to approve or vote down these key details and companies are likely to find this loss of flexibility and control difficult to manage. In addition, timing issues are likely to arise in terms of the granting of awards. Companies generally make their annual LTIP grants after the preliminary announcement of their results, so normally in advance of the AGM. Presumably in future, if the proposals are implemented, all grants to directors will have to be conditional and revoked if shareholders do not approve the company’s remuneration policy. An alternative will be for companies to change the time at which they grant awards but this may cause transitional and other difficulties.