UK government calls for more transparency in directors' pay reporting
The UK's Department of Trade and Industry (DTI) wants its model for the disclosure of UK directors' remuneration to improve on the US template as it opens a three month consultation on draft legislation.
The DTI's consultation covers the regulations governing a shareholder vote on directors' remuneration. It gives details of the information it thinks quoted companies should give their shareholders before annual general meetings (AGMs) and stresses the need for "a sharper edge than the US Securities and Exchange Commission (SEC) requirements".
According to the DTI, the details should include a forward-looking report on remuneration policy, which will have to include details of the company's performance criteria for long-term incentive schemes. It should provide an explanation of compensation payments made in the previous financial year and details of how the remuneration packages of executive directors are decided.
In addition, quoted companies should be required to show at least one graph showing how the company has performed in comparison with selected competitors, over a five-year period. Even if a company does not operate a share option or other long-term incentive scheme, it should provide a line graph showing its performance against a specified criterion, probably total shareholder return.
Such a graph is required by the SEC in the US. The UK aims to improve on US practice by requiring extra graphs where a company operates a share option or long-term incentive scheme with performance conditions. The DTI says a line graph should be required in respect of each condition.
Furthermore, it proposes that companies should be required to state the name of the company, companies or index that was used for purposes of comparison in respect of each performance condition. The line graphs should show how the comparators, as well as the company, have performed in respect of the relevant performance condition.
The draft regulations follow the government's announcement in October that it intended to give shareholders the legal right to vote on boardroom pay. The move was criticised at the time for being too weak, but a DTI spokesman said: "It is important that there is effective dialogue between directors and shareholders on directors' pay. Shareholders will be able to vote at the AGM on whether they agree with the remuneration policy statement and whether they are happy with the incentives scheme."
The government is expecting that quoted companies should be required to produce a directors' remuneration report for shareholder approval for financial years ending on or after December 31 2002.
