Executive Pay Shake Up

23 September, 2014

The Financial Reporting Council’s UK Corporate Governance Code (“the Code”) sets out principles of good practice for companies listed on the London Stock Exchange. The Code operates on a ‘comply or explain’ basis, meaning listed companies are required to comply with the provisions of the Code or explain to shareholders, in the annual report, why they have deviated from it.

The Code has been updated and the revised Code will apply to accounting periods on or after 1 October 2014.

The Financial Reporting Council (“the FRC”) has introduced new requirements into the Code and in particular it has specified that boards of listed companies should ensure “executive remuneration is aligned to the long-term success of the company and demonstrate this more clearly to shareholders”. Specifically companies should be able to claw back bonuses or withhold them if trading goes sour. The code no longer includes the rationalisation that remuneration should be enough to “attract, retain and motivate directors of the quality required”. This means companies will not be able to use the justification of “retaining talent” to pay large remuneration packages.

In addition to these changes, the FRC has confirmed that companies will need to publish a “viability statement” in the strategic report, which will set out the risks to the company and will state what the company will do to mitigate these risks.

The FRC Chief Executive, Stephen Haddrill, has commented on the changes saying “The changes to the Code are designed to strengthen the focus of companies and investors on the longer term and the sustainability of value creation…The changes on remuneration also focus companies on aligning reward with the sustained creation of value rather than, as before, simply on retention – a focus that has tended to promote pay escalating and leap-frogging”.

The next review of the Code will tackle boardroom diversity.