What do the requirements involve?
The regulations require UK listed companies with more than 250 employees to disclose annually the ratio of their CEO’s pay to the median, lower and upper quartile pay of their UK employees. The first statutory disclosures will be provided from January 2020, although early disclosure by some companies is expected following indications made by the Financial Reporting Council and the Investment Association.
The new rules also require:
- all large companies to report on how their directors take employee and other stakeholder interests into account; and
- all large private companies to report on their corporate governance arrangements (with many such companies expected to adopt the new Wates Principles).
Quoted companies are also under a new statutory duty to set out the impact of share price growth on executive pay outcomes, which is intended to provide greater clarity for shareholders.
The UK's Business Secretary Greg Clark said that the regulations will give workers "a stronger dialogue and voice in the boardroom" and ensure that "businesses are accountable for their executive pay".
Investor guidelines updated
A number of institutional investor groups have recently published updated versions of their guidance, including the GC100 and Investor Group.
The Investment Association has published its Principles of Remuneration for 2019, which include investor expectations that companies will widen the triggers under which malus and clawback provisions can be used to forfeit or recover remuneration beyond 'gross misconduct' and 'mis-statement of results'. Companies should also set out the process for implementing malus and clawback, not simply the triggers. The new Principles also expect companies to require directors to hold a proportion of their shares for a minimum of two years after their departure.
In addition to preparing to report under the new regime, listed companies will be reviewing their employee share scheme rules, policies and procedures to ensure that they reflect the new Code and guidance.