Abstract The purpose of this assignment is to examine the recent regulatory changes that have taken place in directors’ remuneration requirements in Singapore, the United Kingdom and the Lignite States. The first part of this assignment will address the regulated remuneration cycle in these three counties; which would be consisting of four activities: Remy narration practice; disclosure of remuneration; engagement on remuneration; and voting on remuneration.
It has been witnessed that remuneration practice is largely regulated by statements of good practice, while legislative intervention is most prevalent or remuneration disclosure and voting on remuneration. Shareholder engagement is subject to the least amount of regulation, with most regulation being self-regulation by institutional investors. The second part of this assignment will compare these regulatory changes in the aforementioned countries with the proposed changes in Europe and Australia.
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The implications of this analysis will determine whether these changes have gone too far in empowering shareholders or do they fall short of reigning in excessive remuneration of directors. It has been a recent attention in front of he eyes of the public, as the focus grew on problems associated with the then remuneration of the executives (senior managements and directors) in companies, and since then, there have been changes in the executive remuneration in various countries to counter the problems.
The remuneration refers to the payment (includes elements such as flat rate salaries, as well as bonuses, share options, restricted share plans, pensions and benefit like healthcare and cars) offered to attract the top quality executives, and at times the level and range of payment increases depending on how an individual executive is on demand.
The elements mentioned are important to be considered as the remunerations should be able to reflect the efforts of the driving engines of the companies which are the senior managements and directors. For the purpose of this essay, changes in executive remuneration of 5 countries, such as Australia, U. K. , U. S. A. , Singapore and a country from European Union, will be presented and discussed after which the best changes will be mentioned and recommendations will be provided.
Introduction Executive pay lies at the heart Of current discussions on corporate governance reform and conflicts-of interest management. Increased closure on executive pay, monitoring by the media, and institutional investor activism, all suggest that the current high levels and structures of executive pay are often divorced from management performance, and represent a particularly sharp conflict of interest between management and shareholder interests.
The purpose of this assignment is to consider current research on the burgeoning executive-pay problem and evaluate in the context of regulatory framework of directors’ remuneration requirements in Singapore, the United Kingdom and the United States and conclude which country has better regulatory structure. The regulation of executive remuneration can be conceived around a cycle of four activities: Remuneration practice: the actual practices of firms and individual executives in relation to remuneration.
Remuneration practice includes setting remuneration policy, writing the remuneration contract, execution of the contract (namely the executive performs and the company makes payments according to the contract), and termination of the contract; Remuneration disclosure: the disclosure of remuneration annually via the remuneration report together with ad nondisclosures related to remuneration, such as hare transactions, margin loans, company loans; Engagement on remuneration: the engagement between the company and shareholders on remuneration.
There are two types of engagement: proactive engagement of shareholders by the company and reactive engagement of the company by shareholders. Voting on remuneration: the annual advisory vote on the remuneration report combined with all other remuneration-related resolutions. This is illustrated below in Figure 1 , the regulated remuneration cycle, which shows the regulators involved in each of the four activities The Regulatory framework in UK
Since 2002, publicly listed companies have been subject to non-binding votes on executive compensation. The vote has become a proxy indicator of shareholders’ ‘satisfaction or dissatisfaction’ with a corporation’s executive compensation. Say-on-Pay votes often also indicate what investors think of the company’s performance and behavior and, in some cases, the capability of the CEO- In 2012, the Department for Business, Innovation and Skills (IBIS) proposed further changes to directors’ remuneration reports and voting.
The changes will separate reporting and voting into two parts: * Policy port I A forward looking report setting out all elements of a company’s remuneration policy and key factors taken into account when setting This will be subject to a binding vote at least every three years or when policy changes. The proposed model also provides a binding vote on exit payments above a threshold.
This part the company sets out its arrangements and policies for directors’ remuneration and loss of office payments for the current financial year and/or future years * Implementation report I A backward looking report setting out how the policy was implemented over the past financial year. The votes on the implementation report will continue to be cast annually and will be advisory in nature. This part is the equivalent of the current annual reporting requirements for directors’ fixed and variable earnings.
Elements of this part of the remuneration report will be subject to audit These new regulations will apply to financial years ending after October 2013. How pay is currently regulated The UK has had legislative requirements on the process of reporting to shareholders on directors’ remuneration for more than sixty years. The most notable change in recent years was in 2002, with the introduction of a acquirement on quoted companies to produce a separate directors’ remuneration report.
Shareholders were also, for the first time, given the right to vote on pay, although only on an advisory basis. The registered companies are subject to basic remuneration reporting requirements, with enhanced requirements for quoted companies. These are set out in the Companies Act 2006 and related regulations. In addition, the Listing Rules set out requirements for listed companies, which includes adherence to the principles for remuneration in the Financial Reporting Council (FRR) UK Corporate Governance Code, on a comply or explain basis.
Those companies that are also financial institutions must adhere to the Financial Services Authority (FPS) Remuneration Code, which takes forward internationally agreed standards for pay in the financial services sector. Although there are no specific requirements within company law about the way pay is structured, shareholder groups and other stakeholders in the investment and advisory community have developed their own detailed guidance about how pay should be designed and explained to shareholders.
This sets the criteria which many investors and proxy voting advisors will use o judge remuneration proposals and as a result, has proved influential in shaping the design of remuneration over the last decade. Recent Amendments in DIRECTORS’ REMUNERATION REPORT The reforms are intended to give shareholders more power to hold companies to account over the structure and level of directors’ remuneration through the introduction of a binding vote on a company’s future remuneration policy, as well as increase transparency in remuneration reporting to make it clear what directors are earning and how this links to company strategy and performance.
In addition to the new binding vote on he future remuneration policy for directors, shareholders will continue to have an annual advisory (I. E. , non-binding) vote on the implementation of the directors’ remuneration policy in the previous financial year, including the actual sums paid to the directors. The reforms will come into force from 1 October 2013. The Policy Statement The Policy Statement must set out information on directors’ total compensation arrangements, potential exit payments and the considerations made by the company in determining its directors’ remuneration.
The regulations specify areas to be covered (as set out below) but do not resource the specific detailed disclosures to be made which means that companies can design their own Policy Statement to suit their business model and strategy. One of the key concerns companies will have in drafting their Policy Statements will be the degree of flexibility built into the Policy particularly with regard to dealing with exceptional circumstances and the exercise of discretions.
The regulations provide specifically that the policy Statement must include information under the following heads: Pay Policy: Each element of directors’ pay and supporting information in the form of a table (the Pay Policy Table). I Service Contracts: I All existing contractual provisions that relate to directors’ remuneration. I Scenarios: Graph setting out what directors will be paid for threshold, maximum and below threshold performance.
I Spend on Pay: The percentage change in profit, dividends and overall expenditure on pay in the reporting period compared to the previous period. Exit Payment Policy: I A framework for how the company will calculate directors’ termination payments. I Consideration of Group Employee Conditions: I A statement, amongst other things, about how the pay and employment conditions of other employees were taken into account n setting directors’ pay. I Consideration of Shareholder Views: I A statement about whether and how shareholder views were taken into account in formulating the pay policy.
I The Implementation Report This part of the directors’ remuneration report explains how the directors’ pay policy as set out in the Policy Statement has been implemented in the relevant reporting year and should include the following: A Single Total Remuneration Figure: A table (the Remuneration Table) setting out for each director serving in the reported year a series of single aggregate figures relating to each pay element. Variable Pay Awards: The Remuneration Table must include notes setting out information on the performance conditions for variable pay.
Total Pension Entitlements: I Details of pension schemes in operation, beneficiaries under them, information on the accrued value of the pension of each director were they to retire at the end of the year and assuming a normal retirement date and the value of any additional benefit receivable if a director were to retire early. Loss of Office Payments: I For any person who has served as a director during the year, information on any termination payments, whether made or receivable. I Variable Pay Awards: Information about awards made in the current year under L TIPS, if their value is to be determined in the future.
Comparison of Overall Performance and Pay: I A graph comparing company performance with the chief executive officer’s pay, with total shareholder return being used as a proxy for company performance. Directors’ Shareholdings: Total shareholdings of directors, including share ownership requirements and whether they have been met, and the total numbers of shares and share options that each director owns outright, subject to deferral and subject to performance conditions. I These Regulations are made under section 421 of the Companies Act 2006 Single total figure of remuneration for each director 3. (1) The directors’ remuneration report must, for the relevant financial year, for each person who has served as a director of the company at any time during that year, set out in a table in the form set out in paragraph 4 below the information prescribed by paragraph 5 below. 3(2) References to remuneration are to remuneration for performing, or agreeing to perform, qualifying services. (3) References to remuneration for non-executive directors are to remuneration or being, or agreeing to become, a director. 4) The report may provide a separate table in the form set out in paragraph 4 for the purposes of didst anguishing the information to be supplied in respect of non-executive determinateness within the reporting year to past directors 15. The directors’ remuneration report must contain details of any money or other assets (other than payments reported under paragraph 1 6) made in the relevant financial year to any person who was not a director of the company at the time the award was made but had previously been a director of the many, excluding any sums which have already been shown in the report in the table required by paragraph 3. Statement of performance targets 16. -(1 ) Where the company chooses not to put the directors’ remuneration policy required by Part 4, to a resolution under section AAA at an accounts meeting, it shall (if it has not set out in accordance with paragraph 25(3) in the last approved policy the performance targets for the financial year in which that meeting is held) the details of the performance targets for that year. 2) Nothing in this paragraph requires the disclosure of information about any tater if the disclosure would, in the opinion of the directors, be seriously prejudicial to the interests of the compassionateness of performance targets policy required by part 4, to a resolution under section AAA at an accounts prejudicial to the interests of the company’s of office payments 17.
The directors’ remuneration report must for the relevant financial year show, for each person who has served as a director of the company at any time during that year, or previous years? (a) the total amount of any payment for loss of office paid to or receivable by the person, broken down into each element improvised in that payment and the value of each element; (b) an explanation of how each element was calculated; (c) any other payments paid to or receivable by the person in connection with the termination of qualifying services, including the treatment of outstanding incentive awards that vest on or following termination; (d) where a discretion was exercised, an explanation of how it was exercised. I Statement of directors’ shareholding and share interests 18.
The directors’ remuneration report must, in respect of each person who was a director in the financial year, set out – (a) any requirements n the director to own shares in the company and state whether or not those requirements have been met; (b) in tabular form or forms – (I) the total number Of shares in the company beneficially owned by the director; (ii) details of scheme interests (not including the interests included in the table in paragraphs 3 and 14 of this Schedule) differentiating between those with and those without performance conditions; (iii) details of the shares subject to share options which are unexpressed-Statement of shareholder voting 23.
The directors’ remuneration report must contain a statement setting out in aspect of the last general meeting at which such a resolution was put by the company ? (a) in respect of the resolution to approve the directors remuneration report, of the votes cast, the percentage of votes for, against and number of abstentions: (b) in respect of the resolution to approve the directors remuneration policy, of the votes cast, the percentage of votes for, against and number of abstentions: (c) where in either (a) or (b) there were substantial shareholder votes against the resolution, where known to the company, the reasons for that vote and any actions taken by the directors in response to that. I How pay is regulated in other countries Other countries have similar trends in executive pay to those observed in the ASK, in terms of both quantum and structure, with the balance shifting from base salary in favor of more complicated variable and deferred pay. As a consequence, these countries have also pursued new measures to improve transparency and ensure the process of setting remuneration is robust.
While the UK has been widely regarded as one of the countries with the highest level of scrutiny surrounding executive pay, and the basic foundations of the UK Corporate Governance Code have been widely replicated across Europe, there are recent examples of other countries – particularly those with large financial and banking sectors – introducing measures that go further than current UK requirements. Although there is some evidence of convergence on executive remuneration practices around the world, significant architectural differences in the broader corporate governance framework can make comparisons difficult. Different attitudes towards pay and corporate governance, sometimes rooted in cultural norms, means that although it is helpful to look at measures introduced elsewhere, practices that are effective in one country may not ark in another.
Anticipated changes to executive compensation disclosure over the coming years There has been increased focus on disclosure following a significant number of shareholder reactions to excessive executive pay (and post- employment pay) in nearly every major European market in 2006. This is similar to the US trend in recent years, and it is expected to continue in 2007. New rules adopted by the SEC in 2006 in the US may also drive changes in some European countries. The US changes primarily led to increased disclosure requirements and a focus on executive earnings during the year, tit more detail demanded about how and why compensation was awarded and more transparency regarding peer groups used for benchmarking.
For countries that already require a high degree of transparency, it is expected a greater focus on providing evidence of pay for performance, and a clear understanding of policies for current and past executives’ remuneration, and peer group selection. For countries that currently require disclosure only of aggregate figures, with limited supporting information provided, we expect to see dramatic changes over the next few years as these markets introduce forms aimed at attracting institutional investments at a time when there is increasing scrutiny of corporate governance practices. Larger companies in certain industries will possibly take the lead and voluntarily provide a greater level of disclosure, in anticipation of the eventual requirement to do so.
Current executive compensation disclosure practices across Europe Because the E left it up to the individual Member States to consider the provisions in the recommendations and then to introduce them into their national framework, taking into account national specificities, disclosure practices across Europe vary significantly. Countries such as KICK, Ireland, the Netherlands and France provide individual board disclosure and policy information, while countries such as Finland, Spain, Portugal, and Denmark provide aggregate compensation disclosure with limited policy information. The table capturing some of the current disclosure regimes across Europe is only available in the PDF that can be downloaded (right column) Almost all relevant organizations are complying with the current levels of disclosure required. There are typically no exemptions for disclosure across Europe.
Where companies have a dual listing (such as on NYSE), they provide information to meet the requirements of both Recent developments in Europe Across much of Europe executive remuneration continues to be a matter of investor and public concern. The continuing austerity measures mean that there is a political and popular concern that ‘the pain is equally shared’. For shareholders, variable business performance and returns means that they expect executive pay to be also truly variable. Table summarizes the disclosure regime across Europe Over the last few months there has been extensive media coverage of a fresh round of European Union (EX.) and national initiatives relating to senior pay, ND whether they should reassess the remuneration practices in the financial services and other industries.
The Table below briefly summarizes the recent developments that will be implemented and also highlights what these mean for good remuneration committee pay practices. Summary of recent developmentsFinancial services O EX. – banking: From 1 January 2014 the variable pay of certain staff within major EX. banks will be capped at 100% of fixed pay (or up to 200% with shareholder approval). The European Banking Authority has published a consultation paper proposing the cap should apply o any staff member whose variable pay is greater than 75% of fixed pay and ?75,000 provided they have a material impact on the firm’s risk profile. This captures more staff than originally anticipated and we expect strong push back.
For non-E banks, a similar restriction will apply to identified staff located in the ELI. [1 E ? regulated funds: The EX. institutions are also currently considering what remuneration provisions should be included in an updated directive relating to funds with SUITS status. There is pressure from some political quarters for a banking-style cap, from other quarters for higher bevel guidance only. The outcome will be closely watched as an indicator of the likelihood of caps being required by the EX. in other areas of financial services. 0 Netherlands – financial services: The Dutch government has recently published proposals for consultation that go much further than the EX. proposals.
It is intending to lower the current 100% cap on variable pay to 20% as from 1 January 2015. This cap should potentially apply to all employees in the Dutch financial services sector. I Table summarizes the recent developments in E region I General industry CLC E ? Action Plan: in Autumn 2013 the European Commission is due to publish proposals for (I) consistent levels of disclosure across all member states on remuneration policy for board members and on individual remuneration levels, and (ii) for all member states to give shareholders a vote on the remuneration policy and/ or the remuneration report. There is the risk that negotiations on these proposals will be influenced by developments in the financial services sector.
CLC UK ? updated disclosure and binding shareholder vote: from October 2013, listed UK companies will, by law, have to prepare a new form of annual report on the enumeration of non-executive and executive board members with detailed disclosure on (I) remuneration policy (and its relationship to pay in the rest of the company), and (ii) remuneration actually received (and its link to actual company performance). Shareholders will have a three-yearly, forward- looking binding vote on the remuneration policy and an annual, advisory’ vote on all remuneration realized over the financial year. њ Germany – proposed binding shareholder vote: the German government has just published a draft law that will require German listed companies to submit pay policies for executive board members to a binding shareholder vote from 2014. D Germany – changes to Governance Code: changes to the remuneration provisions within the German Corporate Governance Code were introduced in May to improve practices and disclosure of executive board remuneration.
They include (I) setting maximum pay-out levels on the total and individual pay elements of executive board members, (ii) Supervisory Board considering the relationship between executive board remuneration and staff generally and (iii) improved disclosure on pay policy and pay actually realized, using standardized tables (to take effect from the start of 2014). France – proposed new shareholder vote: the French government has, for the moment, set aside proposals for new legislation on the disclosure of, and voting on executive board remuneration similar to the UK. As an alternative the Association of CACAO companies has agreed with the Government to modify its Governance Code (which is voluntarily followed by all companies) to include a provision recommending shareholders have an additional "say on pay’ vote relating to pay structure. The Government will review the outcome before finally determining whether to revert back to a legislative solution.
I Table memorizes the recent developments in EX. region I C France – high earners: the French government is also looking again at fiscal measures to manage the difference in earnings between executives (and high earners generally) and other employees. A 75% "super tax”, payable by employers, on pay over ?1 m is now under consideration, after a similar tax on individuals was ruled unconstitutional. C] Switzerland – binding shareholder vote: as a result of the initiative of the Swiss politician Thomas Minder, shareholders of listed Swiss companies are due to be given a binding vote on the aggregate remuneration received by (I) supervisory board embers and (ii) executive board members.
Variable pay schemes will also be subject to shareholder approval and certain payments (such as sign-on payments) will be prohibited. The new provisions are expected to come into force in 2015. D Spain – increased shareholder power and updated reporting: The Government is proposing to establish a Commission to review ways to improve the effectiveness and accountability of the management of Spanish companies. This initiative may lead to an updated Governance Code and increased shareholder power with respect to remuneration policies for senior management. In addition, a new template for the reporting of remuneration is expected imminently. O France – public sector pay caps: for 2013 financial year onwards, the French Government has introduced a cap of ?450,000 p. A. N the base pay and bonus of corporate officers of state-owned businesses. Although the cap typically affects the CEO only, it applies to global businesses such as France Telecoms and EDP. C] Belgium – public sector pay caps: The Belgian Government has proposed capping the total remuneration of newly- hired executives into state-owned companies (that is companies where the Tate holds a majority stake), at ?290,000 p. A. (comprising up to ?200,000 base, 30% variable and 15% benefits). The cap is being strongly resisted by businesses as being anti-competitive. An alternative proposal has now been put forward limiting base pay to a multiple of employee pay and bonus to 30%.