Ensuring that listed companies’ boards have an appropriate combination of executive and independent non-executive directors (NED) is a key principle of the UK Corporate Governance Code. The Code thus prohibits paying NEDs with share options or other performance-related elements. Many companies wishing to encourage NEDs to build up a personal shareholding in the company have therefore done so by paying part of their net fees in shares.
What has changed?
Non-prescriptive Corporate Governance Code Guidance is intended to assist using the Code. This Guidance has just been updated as follows in relation to NED pay:
- Boards exploring alternative approaches to NED pay should preserve NED independence, and not do anything which may lead to short term-decision making or create conflicts of interest.
- NEDs may be given share options or other rights to acquire shares, but these should not be performance related.
- A "meaningful exercise price" would impair independence so should not be used.
- The annual report should explain the company’s approach to NED remuneration.
What does this mean?
The increased flexibility signalled in the Guidance will be welcomed by companies. They may now wish to explore alternative payment structures for NEDs, such as nil-cost options, conditional awards, or some form of restricted share awards.
Care should however be taken, and not just to ensure pay is not performance related (the Code prohibition has not changed). There are some potential pitfalls:
- NEDs are not employees. So it will not be possible for them simply to join any existing share plans. These limit participation to employees for company law, financial promotion and financial assistance reasons. Any stand-alone arrangements for NEDs will need to be structured carefully to ensure they comply with relevant requirements.
- NED pay must be within a company’s shareholder-approved remuneration policy. Therefore companies will need to amend their policies to allow new structures for NED remuneration. Companies should engage with shareholders to gauge appetite and support for any innovations in NED pay. Where policies are not due for review or renewal, companies should also consider whether it would be appropriate to seek shareholder approval to revised policies between the usual three-year approval cycle.
Please get in touch to see how we can help with the potential possibilities for your NED remuneration framework, or with any aspect of your remuneration report or policy and pay reviews.
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