Ensuring director remuneration policies align with your company’s share plan rules

Companies should consider whether their arrangements continue to meet their strategic requirements and objectives while allowing the company to attract and retain talent as well as meet investors’ expectations.

What are directors’ remuneration policies?

As well as receiving a basic salary, directors are often offered additional remuneration, including bonuses, share options and other rewards, all of which must be approved by shareholders. In line with UK regulations, a UK quoted company must prepare a directors' remuneration policy (DRP) which is a comprehensive statement of all elements of remuneration which may be paid to the company's directors.

In line with UK regulations, a quoted company’s DRP must be put to a binding vote at least every three years.

A DRP is usually designed carefully in order to align the interests of executive directors with those of shareholders, and to meet the expectations and published guidelines of institutional investors in the company.

What is a quoted company?

Under UK company law, ‘quoted companies’ are subject to a particular reporting framework and disclosure requirements in respect of the remuneration arrangements for their directors. For this purpose, a ‘quoted company’ principally means a UK incorporated company with shares which are listed on the main market of the London Stock Exchange.

The term also captures any UK incorporated company with shares listed on the New York Stock Exchange or Nasdaq, as well as any UK incorporated company with shares which are officially listed in an EEA state. Note that AIM companies are not quoted companies, although some AIM companies do choose to prepare a DRP on a voluntary basis.

Directors’ renumeration policy requirements

The content requirements of the DRP are prescribed under the relevant Disclosure Regulations, and form a forward-looking statement about the relevant company’s framework for remunerating its directors. The disclosure requirements are comprehensive and require every element of remuneration that a quoted company wishes to potentially pay to its directors to be covered in the DRP, from salary and pension contributions to termination payments and the provision of outplacement services. Quoted companies are required to put their DRP to a binding shareholder vote at least every three years, and usually do so as a resolution at their AGM.

Remuneration payments cannot be made to directors unless they are expressly permitted in the DRP, or otherwise expressly approved by shareholders by resolution. There is no threshold for small remuneration payments which can be made outside the DRP, nor any exceptions or exclusions – if a remuneration payment is not contemplated by the DRP, it cannot be paid. Any remuneration obligations which are in breach of the DRP are void, and any payments made outside the scope of the DRP are required to held on trust by the recipient director for the company. Any director who authorises a payment to be made outside of the DRP is liable to reimburse the company for payments that cannot be recovered from the recipient.

A chance to reform remuneration arrangements

The requirement to put a DRP to shareholders recurs at least every three years. Because the requirement was first introduced in 2013, a significant proportion of UK quoted companies will be required to renew their DRP and put it to a binding shareholder vote at their next AGM to be held either in late 2022 or 2023, depending on the company's financial year end.

Companies that are renewing their DRP will often take the opportunity to renew or replace remuneration arrangements, or to introduce changes to the way in which their annual bonus plans and share plans operate.

But while attention is naturally mostly focused on the strategic changes that will be implemented via the new DRP, it is important for companies to make sure that they are taking a joined-up approach and that any changes made at the DRP level flow through to the implementation of their wider remuneration arrangements. Principally this can mean ensuring that any changes are reflected in the rules of any of the company’s annual bonus plans and share plans.

As an example, to meet evolving shareholder expectations and the requirements of the UK Corporate Governance Code, a listed company may wish to update their DRP to introduce new circumstances in which the company can claw back value which has been delivered to directors under their annual bonus and share plans. But where that occurs, we often find that the share plan rules have not been amended to catch up with the new DRP, or have been amended in a manner that is inconsistent with the changes to the DRP. Because share plan awards are contractual, and the terms cannot typically be easily amended, this can often mean that the clawback powers which have been introduced have no legal effect and are not binding on directors in the manner that was intended.

Vice versa, the renewal of the DRP is a good opportunity to ensure that it accurately reflects the terms of the company’s existing share plans. Most importantly, any flexibility or discretion that is afforded to the company’s remuneration committee under those plans should be accurately described in the DRP. We often see companies that fail to note in the DRP some key discretions which are available under their share plans. Failure to disclose those discretions in the DRP can potentially restrict the ability of the remuneration committee to rely on those discretions in the future.

Companies would be well advised to ask their legal advisers to conduct a health-check of their DRP and their share plan rules along the lines of the above as part of their DRP renewal process.

Co-written by James Sullivan-Tailyour.