17 September 2021
The revisions to the UK Corporate Governance Code (the Code) in 2018 included more demanding criteria for remuneration policies and practices. The Financial Reporting Council (FRC) published research on a sample of FTSE 350 companies (both before and after the introduction of the new Code) to show the impact of the new provisions and principles on directors’ remuneration.
Overall, the impact has been positive. Companies are now disclosing more information on remuneration and the majority are linking individual rewards to strategy and long-term performance. There is increased consideration of the environmental, social and corporate governance risks from remuneration policies that, inadvertently motivate irresponsible behaviours. However, the disclosures tended to lack detail on how companies had applied the Code.
Improvements observed included companies:
- engaging with shareholders and aligning remuneration with long-term shareholder interests;
- disclosing how remuneration policies align with the company’s purpose and values, promote long-term success and link to long-term strategy;
- considering workforce remuneration and policies, and alignment with culture;
- including policies for post-employment shareholding requirements (for vested and unvested shares) and holding periods for share awards;
- having policies for enabling the override of formulaic outcomes used to determine remuneration; and
- using non-financial KPIs.
More however could be done to:
- explain plans to identify and mitigate risks associated with excessive awards;
- explain why non-financial KPIs used in pay formulas are chosen, how they are formulated and the link to strategy;
- evidence that remuneration policies do not reward poor performance;
- give clarity about engagement with the workforce;
- evidence how workforce policies and practice are consistent with company values and long-term success;
- set out provisions to recover and/or withhold sums or share awards;
- give reasons for significant votes against the remuneration policy and actions taken; and
- avoid boilerplate wording that lifts text from the Code.
Remuneration remains at the heart of governance and directors need to ensure it contributes to the long-term success of the company. Equally important is ensuring that reporting on remuneration is clear, company specific and provides the detail required by the Code.
If you require any further information on remuneration reporting, please speak to Carolyn Brown.