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Directors Remuneration (UK Companies Act 2006 requirements (The law…
Directors Remuneration
The issue of how much directors are paid has and continues to be a matter of great controversy, particularly for listed companies
The issue first came to great prominence in relation the newly privatised companies such as British Gas where the board directors, now they were in charge of listed companies, saw their pay increase considerably. The issue, and public antipathy to the way pay for listed company directors has increased considerably while the pay of other workers has risen much more slowly or even remained static continues.
The issues has led to a move form no regulation at all, through requirements in the Corporate Governance Code for the board to consider in relation to remuneration through to the situation today where UK quoted companies must put their pay policies in a binding vote by shareholders every three years and an advisory vote on actual pay each year
The issue of how director are awarded for their work is closely linked to the agency theory. There are still wide questions about the key drivers that should be used to measure corporate success and how these are translated into pay for directors. The overall effect of changes in rules and greater scrutiny has tended to increase the complexity of remuneration arrangements
Generally now a listed company director's pay will be a combination of basic salary, annual bonus, pension payments and share options or shares, usually given under a long-term incentive plan
There is now greater emphasis on being able to claw back bonuses and shares from directors when companies subsequently fail, particularly in the financial sector
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The new legal requirements give much more power to shareholders to restrict the pay of directors than they had formally. When companies are doing well and giving good returns to shareholders, there tend to be fewer complaints about executive pay. However when profits and share prices fall but directors' remuneration does not, there can be significant rebellion against director pay policies
There have been examples of shareholders rather than voting against a company's pay policy or actual pay for a year, choosing to vote against the reappointment of the Chairman of the Remuneration Committee or even the Chairman of the Board. The reasoning being that, as non-executive directors, these people should be representing shareholder interests and curtailing excessive pay for the executives. This option is possible because under the existing Code, best practice is for all directors, both executive and non-executive to stand for re-election each year
Quoted Company: A company whose equity share capital: (a) has been included in the official list or (b) is officially listed in an EEA State or (c) is admitted to dealing on either the New York Stock Exchange or NASDAQ
Agency Theory: Predicated on the view that managers of a company are appointed to act as agents of the owners of the company and that there is an inherent conflict of interest between the managers (who control the company) and the shareholders (who own the company)