Chief executives of listed companies face pay overhaul

The rule could mean executives' bonuses get deferred for longer periods before being paid

Bosses of UK listed companies could see their pay packages overhauled under new rules from the Financial Reporting Council (FRC).

The FRC - a body that devises and enforces financial reporting rules - said that remuneration should be aligned with a firm's long-term health.

The rule could mean executives' bonuses get deferred for longer periods before being paid.

It could also drive a shift towards non-cash bonuses, such as shares.

The FRC guidelines - known as the UK Corporate Governance Code - are enforced by a "comply or explain" policy - which means companies either follow them or explain how else they are acting to promote good governance.

"Boards of listed companies will need to ensure that executive remuneration is aligned to the long-term success of the company and demonstrate this more clearly to shareholders," the FRC said in its updated code published on Wednesday.

"Executive directors' remuneration should be designed to promote the long-term success of the company. Performance-related elements should be transparent, stretching and rigorously applied," the FRC said.

The previous version of the code said that companies should "attract, retain and motivate" directors, without paying them excessively. This wording is not included in the latest version.

The FRC's decision to move away from that language is designed to encourage company leaders to adopt longer term strategies, rather than seek short term profits.

Clawback?

The FRC also called for companies to introduce provisions allowing them to recover or withhold variable pay in certain circumstances.

The FRC doesn't specify what these provisions or circumstances could be. They might include the ability to withhold bonuses over longer periods or perhaps demand that previously paid bonuses can be recovered.

This follows similar moves by other authorities.

In July, the Bank of England announced tougher rules on bankers' bonuses.

The central bank houses one of the UK's bank supervisors, the Prudential Regulation Authority. This year, it proposed allowing banks to recover bonuses up to seven years after they had been paid.

Today's announcement from the FRC doesn't go as far as the Bank of England.

That's partly because the FRC's Corporate Governance Code has to cater for a larger number of companies, across an array of industries.

The code applies to all premium-listed companies - the 916 firms that are subject to more onerous rules - although parts of the Code don't apply to smaller firms. Several other companies also voluntarily sign up to the corporate governance framework.

Shareholder engagement

The FRC revises the code every two years. The 2014 version applies to accounting periods beginning after 1 October 2014.

Under the new code, companies are also encouraged to improve the way they engage with shareholders.

The FRC's chief executive, Stephen Haddrill, said, ""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."