Companies to explain the ratio between director and employee pay

Listed companies throughout the EU will have to publish the ratio between average pay for directors and other employees under proposed new European legislation.  The new legislation will come into force in 2015, and will add to the reporting requirements that UK listed companies must already follow under government regulations introduced in October last year.

The new European requirements are part of a proposed set of amendments to the Shareholder Rights Directive, aimed at improving the way that companies engage with shareholders and giving shareholders more of a say in sensitive areas such as executive pay.  The European Commission, which brought out the proposals earlier this month, wants to create a better link between pay and performance for company directors, and believes it can facilitate this by improving shareholder oversight of directors’ remuneration.

Companies will have to publish the ratio between the average total pay for Directors and the average total pay for all other employees, and explain why this ratio is considered appropriate.  When calculating the ratio, all elements of the reward package, including benefits and long-term incentive awards, must be taken into account.  The ratio will form part of the directors’ remuneration policy, along with other information about the purpose, nature and amount of pay directors may receive.

For UK companies, the European legislation will follow hard on the heels of the new directors remuneration reporting regulations, brought out in October last year.  The regulations already set out stringent requirements for what UK listed companies must disclose about directors’ pay and in what format, and in some cases how pay should be structured.  Only the requirement to publish the ratio will be new.

The UK also anticipated the European proposals by increasing shareholder influence over remuneration policy at the same time.  UK listed companies must submit their executive remuneration policy to a binding vote by shareholders at least every three years.  Once the policy is approved, it will be against the law for a company to make payments that don’t conform with the policy, and directors who approve such payments will be personally liable.  Europe intends to make the binding shareholder vote on directors pay a requirement in all EU countries, not just the UK.

The proposed European legislation is likely to come into effect during 2015.  To find out how it might affect you, contact Andrew Menhennet at Yellow Hat Reward (andrew.menhennet@yellow-hat-ltd.com).  Yellow Hat Reward are the only dedicated reward specialist in the Cambridge area, providing consultancy and on-going support in all areas of employee reward, including performance-related pay programmes, international reward, executive pay, benefits and pensions.


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