FRC code update to tackle big payouts
17 September 2014
New rules introduced by the UK accountancy watchdog could mean pay packages for bosses of the UK’s listed companies will be aligned with the financial health of the company.
Wed, 17 Sep 2014
New rules introduced by the UK accountancy watchdog could mean pay packages for bosses of the UK’s listed companies will be aligned with the financial health of the company.
From October, executives who are recruited to London-listed companies, who would usually expect a big payout no matter how their company performs, could now see their bonuses deferred and any negotiations on future pay packages based more on share options related to company performance.
The Financial Reporting Council’s latest guidelines, known as the UK Corporate Governance Code, mean executives’ pay and wider remuneration deals will be more aligned to the long-term success of the company.
The FRC’s code also calls on companies to recover or withhold variable pay in certain circumstances or even demand that previous bonuses be repaid, extending a provision imposed on banks in an earlier version of the guidelines.
One caveat remains for remuneration boards if they are able to persuade shareholders that the big payouts are justified.
"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," said Stephen Haddrill, chief executive of the FRC.
"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 leapfrogging."
Nearly 1,300 companies could be affected by the changes to the guidelines.
However, the Institute of Directors expressed concern over the rationale behind the latest changes to the guidelines.
"The future is inherently uncertain and companies do not have crystal balls,” said Roger Barker, director of corporate governance at the IoD. “Although investors would like companies to provide them with certainty about their future prospects, this is often not realistic.”
Law firm Linklaters said some companies will face difficult decisions over the next couple of months.
Alexandra Beidas, Linklaters employee incentives lawyer, said: “Most companies already have in place provisions for withholding pay in certain circumstances, but far fewer have anything on clawing back payments already made.
“The decision to leave it to companies to determine clawback events appropriate to them is to be welcomed, but companies will need to make some difficult decisions relating to issues such as trigger events for clawback, how long will the clawback risk last, how to structure variable deferred pay to ensure ability to withhold or recover sums in practice, and managing shareholder expectations.”
The revised FRC code, which works on a ‘comply or explain’ basis, will apply to accounting periods beginning on or after October this year.
From October, executives who are recruited to London-listed companies, who would usually expect a big payout no matter how their company performs, could now see their bonuses deferred and any negotiations on future pay packages based more on share options related to company performance.
The Financial Reporting Council’s latest guidelines, known as the UK Corporate Governance Code, mean executives’ pay and wider remuneration deals will be more aligned to the long-term success of the company.
The FRC’s code also calls on companies to recover or withhold variable pay in certain circumstances or even demand that previous bonuses be repaid, extending a provision imposed on banks in an earlier version of the guidelines.
One caveat remains for remuneration boards if they are able to persuade shareholders that the big payouts are justified.
"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," said Stephen Haddrill, chief executive of the FRC.
"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 leapfrogging."
Nearly 1,300 companies could be affected by the changes to the guidelines.
However, the Institute of Directors expressed concern over the rationale behind the latest changes to the guidelines.
"The future is inherently uncertain and companies do not have crystal balls,” said Roger Barker, director of corporate governance at the IoD. “Although investors would like companies to provide them with certainty about their future prospects, this is often not realistic.”
Law firm Linklaters said some companies will face difficult decisions over the next couple of months.
Alexandra Beidas, Linklaters employee incentives lawyer, said: “Most companies already have in place provisions for withholding pay in certain circumstances, but far fewer have anything on clawing back payments already made.
“The decision to leave it to companies to determine clawback events appropriate to them is to be welcomed, but companies will need to make some difficult decisions relating to issues such as trigger events for clawback, how long will the clawback risk last, how to structure variable deferred pay to ensure ability to withhold or recover sums in practice, and managing shareholder expectations.”
The revised FRC code, which works on a ‘comply or explain’ basis, will apply to accounting periods beginning on or after October this year.
