Legal Q&A: Disclosure of pay and bonuses

What’s the current position?

The Walker Review published by HM Treasury in July this year, and the Equality Bill introduced in the House of Commons on 24 April 2009, both talk about introducing a requirement for certain employers to publish information about the pay of their employees. However, no regulations requiring such disclosure have been put into force yet, and the proposals only extend to certain groups of employers.

Who are these groups of employers?

The Walker Review makes recommendations in respect of UK banks and other financial institutions only. However, if the Financial Reporting Council includes the recommendations in its Combined Code, which includes good practice in remuneration, there is the potential that they will also apply to all listed companies. The Equality Bill provides for the introduction of a pay disclosure requirement for those employers with 250 or more employees, or public bodies with more than 150 staff.

What is the Walker Review?

A The Walker Review is an independent review commissioned by the government in February 2009 to examine and make recommendations in relation to corporate governance in UK banks and other financial institutions. It recommends substantial changes to the way the boards of banks and other big financial institutions function, in particular through boosting the role of non-executive directors in the risk and remuneration processes.

Walker does not make any proposal that remuneration should be capped, but its focus is on the structure of remuneration, provisions for deferment of remuneration, and having appropriate linkage between performance and remuneration, along with increased public disclosure about pay.

Why was there a need for this review?

The government believes it was the failures in the governance of banks and other financial institutions which made the financial crisis much worse. Bonus schemes are believed to have contributed to excessive risk-taking by rewarding short-term performance. The Walker recommendations are designed to improve the governance in banks and discourage short-term high-risk taking.

What sort of things does the Walker Review recommend on remuneration?

A Recommendation 31 proposes that the remuneration committee report should disclose the pay of highly paid executives (those executives that are paid more than the median of the executive board members). The proposal is that banks should disclose, in a series of bands, how many staff earn more than the boardroom average and, within each band, detailing salary, bonus, long-term awards and pension contributions.

Recommendation 33 proposes that not less than half of expected variable remuneration awards should be on a long-term incentive basis with vesting, subject to performance conditions, deferred for up to five years. The review also advises that the remuneration committee should ensure that the basic salary level of executives is not increased excessively because of these measures imposed on bonuses.

Recommendation 37 proposes that the remuneration committee report should state whether any executive board member or senior executive has the right or opportunity to receive enhanced pension benefits beyond those already disclosed. This is to reduce the likelihood of inappropriate termination awards.

When does the review come into effect, and who will be affected?

The consultation document was published on 16 July 2009 and a second consultation period ran until 1 October 2009. The final report will be published in November 2009. Walker proposes that most of the recommendations are enforced through inclusion in the Combined Code on Corporate Governance. It will be for the Financial Reporting Council, which is currently reviewing the Combined Code, to decide to what extent the review recommendations should be considered best practice not just for banks, but also for all listed companies.

What does the Equality Bill say about disclosure of pay?

The government believes that greater equality can be achieved by encouraging transparency in a number of different areas. The Equality Bill contains a power for the government to issue regulations requiring employers with 250 or more employees to publish information about employees’ pay. The purpose of this would be to show whether in the employer’s organisation, there are differences in the pay of male and female employees. The Bill does not state the information that will have to be disclosed by an employer, simply that the regulations may prescribe the “descriptions of the information” and “the form and manner in which it is to be published”. This part of the Bill has attracted a lot of press coverage.

When might it come into effect?

In its White Paper on the Equality Bill A Fairer Future, published in June 2008, the government commits not to use this power before 2013, and explains that it will only do so then “if sufficient progress on reporting has not been made”. However, the position regarding gender pay reporting in the public sector is different. The government envisages that from 2011, public bodies with more than 150 employees will be required to publish annual details of their gender pay gap, ethnic minority and disability employment rates.

What about ‘secrecy clauses’?

A With a view to promoting transparency, the Equality Bill prohibits pay secrecy clauses in contracts of employment which prevent employees from having “relevant pay discussions” with their colleagues. A relevant pay discussion is a discussion that “relates to whether or to what extent there is… a connection between pay and having a particular protected characteristic”. Many financial institutions have such clauses in their employees’ contracts. The effect of the Bill will be to prevent the employer from enforcing this secrecy clause if the employee is discussing a pay differential which may be discriminatory.

A great deal of doubt has been cast on the effectiveness of these provisions. Would an employee asking a colleague what they are paid say their reason is that they suspect discrimination?

Is this Equality Bill subject to change?

Yes – the first reading of the Bill in the House of Lords is expected to take place in autumn 2009 and amendments can be proposed by the House of Lords. The Bill is not expected to receive Royal Assent and become an Act until spring 2010. Furthermore, given that there is likely to be a change in government between now and 2013, it is not certain that the proposed regulations concerning gender pay disclosure will come into force.

Vanessa Hempstead, solicitor, Thomas Eggar

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