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New rules on directors' pay working, says DTI

EXECUTIVE PAY

New rules on directors' pay working, says DTI

Better disclosure on directors' pay is leading to improved dialogue between companies and shareholders, according to new research published by the trade and industry secretary, Patricia Hewitt.

In a written statement to Parliament, Patricia Hewitt said that rules on pay disclosure introduced by the government (Directors' Remuneration Report Regulations 2002) had had a "positive impact" and that the independent report by Deloitte and Touche underlines the "effectiveness of the government's action in making directors' remuneration to closer scrutiny by shareholders".

As a result of the findings, the government has decided against new provisions on directors' remuneration in the forthcoming Company Law Reform Bill.

Key findings of Deloitte and Touche report

The report shows:

  • A "significant increase in the levels of compliance" with the Directors' Remuneration Report Regulations. The research shows a rapid and almost complete reduction in directors' notice periods to one year or less, and high disclosure standards of 80% or more in 19 out of the 22 areas covered by the regulations.
  • "Growing investor satisfaction with improved disclosure" on director's pay and awards. All of the top 350 FTSE companies now put their remuneration report to a separate shareholder vote.
  • Better communication and engagement between shareholders and companies -- over 90% of shareholders say communications have improved.
  • Companies changing their remuneration policies and practices to reflect the link between pay and performance. For example: directors' awards are now more likely to be vested proportionally to set levels of performance with full vesting of awards only for more stretching performance targets.

"Best practice guidelines"

Patricia Hewitt called on the Association of British Insurers and National Association of Pension Funds, and the Confederation of British Industry, to develop a common set of best practice guidelines on directors' contracts.

The research identifies minor changes to the Regulations in order to further clarify what is required of companies with regard to some elements of their annual remuneration report and suggests some additional improvements to the transparency and quality of the information provided.

Consideration will be given to the need for the changes suggested by the report in the light of views expressed by stakeholders and better regulation principles.

A final word

"Today's report shows that the regulations we introduced in 2002 have delivered a substantial change in behaviour. We are now seeing higher levels of compliance by top British companies, improved disclosure of directors' pay and rewards and better engagement with shareholders. The UK now has a corporate governance framework for directors' pay that leads the world in terms of transparency and accountability. While we are not complacent, we believe that a combined approach that develops best practice, underpinned by legislation, is the best way to tackle this issue." -- trade and industry secretary, Patricia Hewitt.

Want to know more?

The Directors' Remuneration Report Regulations 2002 require quoted companies to publish a directors' remuneration report for each financial year.

The 56-page Deloitte and Touche study, entitled Report on the Impact of the Directors' Remuneration Report Regulations is available for download in PDF format at www.dti.gov.uk/cld/Deloitte_Rep_DRRR_2004.pdf or via the main DTI homepage at www.dti.gov.uk (see the "company law" site and follow links to consultation documents).

The research was based on a detailed analysis of companies' latest annual reports and a survey of the views of shareholders, institutional shareholders' representative bodies, the CBI, ABI, NAPF and the IMA.

Posted 4 February 2005