The Financial Reporting Council has published final revisions to the UK Corporate Governance Code which will apply to UK listed companies for accounting periods starting on or after 1 October 2014. The revised Code contains changes to the sections on directors’ remuneration, primarily in relation to the performance-related elements of long term incentives, clawback of variable pay and the retention of shares by directors.
These are the first changes to the remuneration-related aspects of the Code since 2010, and follow consultations in 2013 and 2014. The changes relating to remuneration are limited in scope, as the FRC decided to defer making any more wide-ranging changes until it can assess the impact of the recent changes to voting and reporting on directors’ remuneration.
The main new provisions relating to remuneration are:
- performance-related elements of directors’ remuneration should be transparent, stretching and rigorously applied. The FRC was concerned that the previous wording regarding remuneration being ‘sufficient to attract, retain and motivate directors’ could be misconstrued, so this has been removed.
- performance-related remuneration schemes should enable the company to recover sums paid or withhold payments and specify the circumstances in which it would do so (i.e. clawback and malus provisions). This replaces a provision that ‘consideration should be given’ to clawback provisions in exceptional circumstances of misstatement or misconduct.
- there should be an appropriate balance between fixed and performance-related remuneration, and immediate and deferred remuneration.
- remuneration committees should consider imposing minimum shareholding requirements after the vesting of share awards, including after directors have left the company.
Most of these changes reflect the changing market practice in directors’ remuneration that many larger listed companies will already have implemented and concepts such as bonus deferral and clawback are now prevalent in the financial services sector as a result of the FCA remuneration code. Having seen the benefit of such remuneration structures in the financial services industry, institutional shareholders are clearly keen for them to be applied more widely.
In view of the ‘comply or explain’ principle in the Combined Code, it will be interesting to see how companies respond to the changes. While some of the new provisions are only recommendations (for example, the minimum shareholding requirements), if companies do not intend to introduce malus and clawback provisions they will need to explain to shareholders why they are not appropriate in the circumstances.
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