The GC100 and Investor Group published on 7 December an updated version of its Directors’ Remuneration Reporting Guidance. The guidance is available via the Thomson Reuters Practical Law website.
This is the second revision of the guidance, which was first published in 2013 following the introduction of new reporting regulations (the "Regulations"), and revised in 2016, following the end of the first three-year cycle of shareholder-approved remuneration policies.
This year, in response to amendments to the Regulations, the Group conducted a thorough review of the guidance with new material added to address the amendments to the Regulations, and existing material revised where appropriate. The primary areas that have been amended or are new include:
- Section 2.2 (Annual statement) provides guidance on the new requirement for the remuneration committee chair's annual statement to include a summary of any discretion exercised in the award of directors' remuneration, expanding the list of the disclosures that companies may wish to consider.
- Section 3.1 (Single total figure of remuneration) provides guidance on the new requirement for companies to disclose the amount (or estimate of the amount) of a short-term or long-term incentive award that is attributable to share price appreciation and, where discretion has been exercised, how the award was determined and whether discretion has been exercised due to share price appreciation or depreciation.
- Section 3.9 provides new guidance on the CEO pay ratio requirement, including consistency of reporting, the positioning of the information in the remuneration report and the methodology used to calculate the requisite figures.
- Section 4.8 (Illustrations of application of remuneration policy) includes guidance on the new requirement for the remuneration policy to disclose, in relation to long-term incentives and other awards with performance measured over more than one financial year, an indication of the maximum remuneration receivable assuming share price appreciation of 50% during the performance period.
The amended Regulations apply to financial years beginning on or after 1 January 2019 so in most cases will only be legally required for reports appearing in calendar year 2020 (although the updates to the illustrations of potential director remuneration which need to show an element of share price appreciation will be required for remuneration policies for which shareholder approval is sought in 2019 and early adoption of other disclosures such as pay ratios is encouraged).
Companies (and their advisors) should read the guidance, alongside the Regulations, when preparing their remuneration reports, noting the fourfold disclosure methodology proposed by the Group of:
- “Must” – a mandatory disclosure which companies must include to ensure compliance with the Regulations and the Companies Act 2006.
- “Should” – a disclosure which, although not expressly required by the Regulations, reflects the underlying intention of the regulations and is established as good practice.
- “May wish to consider” – a disclosure that goes beyond the specific requirements of the Regulations to promote effective engagement between investors and companies.
- “Investors generally expect” – a disclosure that provides some context for companies.
The guidance comes at a time when updated institutional guidance has been published by the Investment Association, Institutional Shareholder Services and Glass Lewis – see our briefing.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2020