Renewing your DRP? Check alignment of your share plan rules

More than half of FTSE listed companies are planning to renew their Directors’ Remuneration Policy at their next AGM. Why is that necessary and what is HR’s role? We’ll consider that. 

The requirement to put a DRP to shareholders recurs at least every three years. Given the requirement was first introduced back in 2013, a significant number 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. That’s fine but a key point around this has been flagged by our shares plans team in their Out-Law guide, namely, to ensure that policies align with the company’s share plan rules. Similarly, the other side of the same coin, the renewal of the DRP is a good opportunity to ensure that it accurately reflects the terms of the company’s existing share plans.

HR does have an important role to play in this and so to understand more on that I spoke to one of the authors of that guide, share plans specialist James Sullivan-Tailyour:

James Sullivan Tailyour: “Every company which is listed on the main market of the London Stock Exchange and also, actually, some UK incorporated companies that listed on other stock exchanges are required by law to prepare something called a directors’ remuneration policy. The directors’ remuneration policies are sort of a forward-looking framework that sets out the parameters within which the company can remunerate its directors and it has to be comprehensive because if any element of remuneration is not covered by the policy it's not permitted for it to be paid to directors. So, it's a very comprehensive statement that covers everything from basic salary through to pension through to share options and termination payments and so on. The reason that this is relevant for companies that are caught by the regulations is that, because of the way the regulations work, and the fact that you have to renew your directors’ remuneration policy at least every three years, a large proportion of the FTSE 350, in fact more than half the FTSE 350, will be required to renew their directors’ remuneration policy and put it to shareholders at their next AGM, which will either occur at the end of this year, so the end of 2022, or in 2023. The directors’ remuneration policy is a very lengthy document, there are a lot of stakeholders involved, so companies typically begin to prepare their directors’ remuneration policy fairly shortly after the AGM for the year prior to which they're going to put the directors’ remuneration policy to shareholders for renewal. i.e., now.”

Joe Glavina: “It’s likely that many companies are already starting this process and, I assume, HR professionals are likely to be involved in the preparation of the policy and some of the issues that will arise from it. Is that right?” 

James Sullivan-Tailyour: “Yes absolutely. So I mean, different organisations will divide up the responsibility for the directors’ remuneration, policy preparation in different ways but, either way, HR is going play a really important role in drafting the policy, not least because a large focus of institutional investors is making sure that the remuneration that's paid to directors is aligned to, or at the very least is set by reference to, the pay and conditions that are available for the wider workforce. So, HR as a minimum are going to be really key to making sure that that element of the drafting of the directors’ remuneration policy is thought about and that the pay and conditions available to the wider workforce are reflected, but there are all sorts of other ways in which HR are likely to be involved. So, for example, if the HR function within your organisation has responsibility for share plans or bonus, then the HR function will need to input into the sections of the policy that deal with those aspects of remuneration. Likewise, the policy to do with the termination of directors or the recruitment of directors. If that's something that HR is responsible for, or has input in, then it will need to contribute to the preparation of the directors’ remuneration policy as well. Some of the particular issues that companies need to be thinking about, and HR professionals in particular, is really making sure that there's a joined-up approach to drafting the policy before it's taken to shareholders. Sometimes, remuneration policies can be prepared without having referenced all of the background documents that make the company's remuneration arrangements work in practice. So, for example, sometimes the remuneration policy doesn't actually reflect the provisions of the company's bonus plan, or long-term incentive plan. So, for example, the description of what is, or is not, a category of ‘good leaver’ isn't quite joined up. Or, perhaps, the description of the circumstances in which the company can apply clawback to awards isn't as comprehensive as the statement that's in the share plan rules, for example. Then also from the other perspective, as well, you want to make sure when drafting the directors’ remuneration policy, that you're capturing all of the discretions that are in your bonus plan rules or your share plan rules. So, for example, if you have flexibility with regards to dividend equivalents and the basis, or the timing, over which they're paid, is that properly reflected in the drafting of the directors’ remuneration policy? HR sit between the remuneration committee that's got its eye on the sort of the strategy and the presentation to shareholders, and the company secretarial team that perhaps might own the legal documents that set out the framework for a for a share option plan. HR plays a really important role in bringing those altogether and making sure that the one does not lose sight of the other.”

Joe Glavina: “You say in your Out-Law guide that companies would be well advised to conduct a health-check of their DRP, and their share plan rules. I guess that is something you want clients to be doing now?”

James Sullivan-Tailyour: “Yes absolutely, we are, and it's important to start that early as well. If you leave that process right until the end there might not be enough time, or scope, to make the changes to the directors’ remuneration policy that might need to be made to reflect how the share plan rules, for example, operate in practice. So yes, we are absolutely starting that process for a number of clients, even those who won't be putting their directors’ remuneration policy to shareholders until the spring of 2023.”

The share plans team have written in some detail about this in their Out-Law guide. It’s called ‘Ensuring director remuneration policies align with your company’s share plan rules’ and you can find it on the Out-Law website.

LINKS
- Link to Out-Law guide ‘Ensuring director remuneration policies align with your company’s share plan rules’