Say On Pay - UK Law

UK Law

Originally UK company law set a default rule that the remuneration of directors was to be set, binding, by the company's general meeting, under Table A, article 54, attached to the Companies Act 1862. Over time more and more companies gave the right to directors, which is the position found in the Model Articles for companies today, that remuneration of the directors shall be determined by the directors.

The United Kingdom was the forerunner in mandating that shareholders be allowed a non-binding, or advisory vote on pay. In the UK, section 439 of the Companies Act 2006 mandates a vote on director pay at the yearly accounts meeting. Directors are expected to have disclosed their remuneration package in a "Remuneration Report" (section 420). Failure to do this leads to fines.

In addition, UK law regulates more tightly a number of elements beyond basic director pay. Employee share schemes that directors have must be approved by ordinary resolution under the London Stock Exchange Listing Rule 9.4.1. Under the Combined Code, with which all listed companies must comply or explain why they do not, a binding vote on approval of long term investment plans is recommended. Under section 188 of the Companies Act 2006 a shareholder resolution is necessary to approve a director’s contract lasting more than a 2 year term (reduced from approval beyond a 5 year term under the old Companies Act 1985, section 319). Lastly, frivolous categories of compensation are limited under section 215, by prohibiting payments for loss of office (i.e. no golden parachutes), except, under section 220, in respect of damages for existing obligations and pensions.

Although the say on pay provision in section 439 is not binding on the board, the message in UK law is influential, because company members have an unrestricted right to fire any director, with reasonable notice, under section 168. The debate, however, moved on to whether the vote should become binding.