DIRECTORS’ PAY - 12.10.2011

We’re scrutinising directors’ pay!

Open consultation. The Department for Business Innovation and Skills recently launched a consultation on company reporting requirements. It says that it wants to simplify this process wherever possible and have greater transparency when it comes to directors’ performance and remuneration. This would involve a higher level of checks and balances being placed on them. In addition, it’s looking closely at giving company shareholders and employees greater rights in this area. So what’s going on?

Proposed changes. If given the go-ahead, the move would almost certainly lead to formal disclosure requirements being placed on the board with regards to the: (1) pay ratios between the directors’ overall earnings and the median earnings of the workforce as a whole, i.e. the differences between them; (2) total expenditure on directors’ remuneration as a proportion of the company’s profits; and (3) proposals for directors’ future remuneration based on past performance. These duties, if adopted, would come into effect on October 1 2012.

Given a say on pay. There are also changes proposed in respect of “remuneration committees”. They would require the appointment of a number of “independent” members, i.e. individuals who are not on the board of directors, and various employee representatives who would scrutinise top-level pay. Together with the shareholders, they would then make recommendations on the board members’ remuneration. However, whilst shareholders can only currently vote in this area on an “advisory basis”, their vote would be made binding.

Sounding scary. The above has been proposed partly due to the government’s concerns over equal pay - but, don’t worry, there is some good news! Not only is it all at the consultation stage - meaning that it might not actually come in - it won’t be applied to “unquoted” companies if it does. In other words, if your business doesn’t trade on the stock exchange, it won’t come under this type of scrutiny.