The new Code should be considered in relation to current changes to remuneration policy.
The Financial Reporting Council (FRC) published the 2018 UK Corporate Governance Code on 16 July. This will apply to accounting periods beginning on or after 1 January 2019.
The new Code is shorter and sharper than it predecessors, but still sets out the fundamental corporate governance framework for companies listed on the main market of the London Stock Exchange.
This article comments on the provisions of the Code that govern executive remuneration.
Our note on the broader aspects of the new Code is available here.
The new Code addresses some of the issues that have led to public disquiet over executive pay, including
The Code stresses the importance of designing remuneration policies and practices to support strategy and promote long-term sustainable success. Executive remuneration should be aligned to a company’s purpose and values, and be clearly linked to the successful delivery of the company’s long-term strategy (Principle P).
It also states that the remuneration committee should review workforce remuneration and related policies, the alignment of incentives and rewards with culture, and take these into account when setting executive pay policy (Provision 33).
The revised Code also emphasises the role of the board in exercising independent judgement and discretion. A new Provision requires (on a ‘comply or explain’ basis), incentive plans to allow boards to override ‘formulaic outcomes’ where, for example, the measurement of any performance condition does not reflect the actual performance of the company or the individual director over the relevant period.
Incentive arrangements should also allow the company to recover and/or withhold sums or share awards in specified circumstances (Provision 37).
In line with developing market practice the Code now recommends extending total vesting and holding periods for executive share awards to a minimum of five years to encourage companies to focus on longer-term outcomes in setting pay:
‘Remuneration schemes should promote long-term shareholdings by executive directors that support alignment with long-term shareholder interests. Share awards granted for this purpose should be released for sale on a phased basis and be subject to a total vesting and holding period of five years or more. The remuneration committee should develop a formal policy for post-employment shareholding requirements encompassing both unvested and vested shares’ (Provision 36).
New reporting obligations have been introduced, which include a requirement that companies disclose what workforce engagement has taken place to explain how executive remuneration aligns with wider company pay policy.
There is also a new requirement (on a ‘comply or explain’ basis) that the remuneration committee chair will have served for at least twelve months on another remuneration committee before taking on this role.
The remuneration provisions of the new Code are in line with those published for consultation last December.
In part they are the result of continued public scrutiny of executive pay, and require companies to respond to this with carefully designed policies which align appropriate reward with sustainable long term value creation.
As the new Code applies to accounting periods beginning on or after 1 January 2019, it will need to be considered in relation to any current changes to executive remuneration policies and practice.
The Code also heralds an expanded remit for many remuneration committees and coupled with the requirement for Chairs to have at least twelve months experience, it increases the focus on the effectiveness of remuneration committees themselves.
If you would like to discuss the new Code, or any other remuneration matters, please get in touch with your normal contact or e-mail email@example.com.
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