Listed companies entering into new service contracts with directors, or renewing or modifying existing contracts, on or after 27 June 2012 must ensure that those contracts are compliant with the proposed new executive pay regime. The new regime will apply to premium and standard listed companies, but not to AIM or PLUS-quoted companies.
Under the Enterprise and Regulatory Reform Bill, currently being debated in Parliament, remuneration or termination payments to directors of listed companies must be made in accordance with a remuneration policy which has been approved by shareholders (or the specific payment must be approved by shareholders). If a payment is made in breach of this requirement, the recipient will be liable to repay it and the directors who approved the payment will be liable to indemnify the company for the loss caused.
Companies will be required to ask shareholders to approve their remuneration policy at least every three years, or when any change to the policy is proposed. If the vote is lost, the company must continue to comply with the previously approved policy until a revised policy has been approved.
There must also be an annual advisory vote on how the remuneration policy has been implemented. If this vote is lost, the policy must be put to a binding vote again at the next annual general meeting.
Consequential changes will be made to the regulations setting out the requirements for the directors' remuneration report in listed companies' annual accounts. When a vote is to be taken to approve the company's remuneration policy, the report must include a separate section setting out all elements of a company's remuneration policy and key factors that were taking into account in setting the policy. Every year there must be a section on how the remuneration policy has been implemented, including a single figure for directors' total pay.
The Bill is expected to take effect as an Act in October 2013, and would apply to payments made to directors after the end of the first financial year beginning after that date: for example, if a company has a 31 December financial year end, the new restrictions would apply to payments made on or after 1 January 2015. If the company approves a remuneration policy under the Act which takes effect earlier than that, the restrictions would apply from the date the remuneration policy takes effect.
Payments required to be made to directors under existing contracts will be exempt from the new restrictions, but only where the contract was entered into, or was last renewed or modified, before 27 June 2012.
Listed companies must therefore take the proposed new regime into account when negotiating service contracts with new directors, or when renewing or changing the contracts of existing directors. Future contracts should not commit the company to make any payment which would be unlawful under the Enterprise and Regulatory Reform Bill, when it becomes law.
Click here for further information on the new executive pay regime for listed companies.
For further information, please contact:
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This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.