Payment rules put accent on disclosure is key to top pay code

The proposed code aims to ensure companies comply with agreed guidelines. Peter Rodgers reports looks at the main points of yline in here to grid strap Book locked top grid Strap Book locked to grid strap Book locked top grid Strap Book locked to grid strap Book locked top grid
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The Greenbury Code

The remuneration code has been aimed at large companies, but the principles apply equally to smaller ones. Listed companies should include a statement about their compliance in their annual reports and areas of non-compliance should be justified. The Stock Exchange should require this as an obligation of listing. The exchange should also introduce a specific obligation to comply with the disclosure and approval provisions of the code and with the provision that bans the issue of share options at a discount.

Remuneration committees

Committees should be made up of non-executive directors with no personal financial interest other than as shareholders, no potential conflicts of interest arising from cross-directorships and no day-to-day involvement in running the business.

The committee chairs should attend the annual meeting and ensure the company maintains contact with its principal shareholders.

Disclosure and approval

The committee's annual report should include an explanation of the company's remuneration policy and disclosure of all elements in the remuneration package of each director by name, such as basic salary, benefits in kind, bonuses and long-term incentive schemes, including share options.

If share options or other long-term schemes are awarded in one large block rather than phased, the report should explain and justify. Pension entitlements should be included, calculated on a basis to be recommended by the Faculty of Actuaries and the Institute of Actuaries. Any service contracts with notice periods in excess of one year year or any provisions for predetermined compensation on termination which exceeds one-year's salary and benefits should be disclosed, and the reasons for the longer notice period explained.

Shareholders should approve all long-term incentive schemes, including share-option schemes which commit shareholders funds over more than one year or dilute the equity.

Remuneration policy

Remuneration committees must provide the packages needed to attract, retain and motivate directors of the quality required, but should avoid paying more than is necessary for this purpose. Committees should be sensitive to the wider factors, including pay and employment conditions elsewhere in the company, especially when determining annual salary increases.

Traditional share-option schemes should be weighed against other kinds of long-term incentive scheme. In normal circumstances, shares granted should not be exercisable in under three years. Directors should be encouraged to hold their shares for a further period. Any new long-term incentive schemes, including new grants under existing share-option schemes, should be subject to challenging performance criteria reflecting the company's objectives.

Consideration should be given to criteria which reflect the company's performance relative to a group of comparator companies in some key variables such as total shareholder return.

Share-options should normally be phased and options should never be issued at a discount. Committees should consider the pension consequences and associated costs to the company of basic salary increases, especially for directors close to retirement.

Service contracts and


Committees should consider what compensation is entailed by contracts in the event of early termination, particularly for unsatisfactory performance.

There is a strong case that notice or contract periods should normally be one year or less. If it is necessary to offer longer notice or contract periods, such as three years, to new directors recruited from outside, such periods should reduce after the initial period.

Committees should take a robust line on payment of compensation where performance has been unsatisfactory and on reducing compensation to reflect departing directors' obligations to mitigate damages by earning money elsewhere. Where notice periods exceed one year, companies should consider paying compensation in instalments.

The code





t All listed companies in the UK should comply with the code. The London Stock Exchange should oblige companies to comply;

t Investors should use their power and influence to ensure implementation;

t Actuaries to recommend a method to calculate the value of pension entitlements earned by individual directors;

t The privatised water and energy companies should review comprehensively their existing remuneration packages in the light of the report, adjust them on a voluntary basis as necessary and make a full report to shareholders for discussion at the first available AGM;

t For any newly privatised companies, no share-option grants should be made until at least six months, and preferably a year or more, after privatisation;

t Gains from executive share options should in future be taxed as income rather than capital gains;

t The Government should change the Companies Act 1985 to remove the obligation to show directors' remuneration in pounds 5,000 bands;

t The Government should review the Companies Act requirements for disclosure of directors' pensions as soon as the alternative approach we recommend is in place;

t The new committee which is to succeed the committee on the financial aspects of corporate governance (the Cadbury Committee) should act as successor to our committee and should monitor responses.

Other points from the report include:

t International comparisons do not suggest that United Kingdom companies in general pay their senior executives too much, though the overall position may mask occasional excesses;

t The report does not recommend a ban on share options, though it suggests changes in the way they are used. It says share options may be attractive to smaller companies as being more affordable in the short term than other forms of remuneration;

t Long-term incentive schemes may be as effective, or more so, than improved share- option schemes in linking rewards to performance.